Chapter 6
RISK ASSESSMENT
Audit risk
Business
Risk
Risk that could lead to business failure
Audit Risk
Risk that the auditors give an
inappropriate opinion on financial
statement
Financial Risk
Inherent Risk
Operational Risk
Control Risk
Reputation Risk
Detection Risk
Components of Audit risk
Inherent risk is the susceptibility of an assertion to a misstatement that
could be material, individually or when aggregated with other
misstatements, assuming there were no related internal controls.
Control risk is the risk that a material misstatement that could occur in an
assertion and that could be material, individually or when aggregated
with other misstatements, will not be prevented or detected and
corrected on a timely basis by the entity’s internal control.
Detection risk is the risk that the auditor’s procedures will not detect a
misstatement that exists in an assertion that could be material, individually
or when aggregated with other misstatements.
Customers are disappointed with the
goods/service
provided
by
company. They tend to sue the
company.
Strategies for answering audit risk questions
Examples of common audit risks
F Fraud
I Incentive to manipulate
N Non-Compliance with Laws & Regulations
D Disclosures are inappropriate & incomplete
I Inappropriate management estimate
N Non-Compliance with IAS / IFRS
G Going-concern assumption is inappropriate
Examples of common audit risks
A
C
I
D
Analytical review (comparing ratios)
Cut-off errors
Inappropriate transition from old system to the new one
Detection Risk