l4 : audit risk

Question 1

what is an audit risk?

Answer 1

risk that auditor expresses an inappropriate audit opinion when financial statements are materially misstated

Question 2

what is the formula of the audit risk model?

Answer 2

AR (audit risk) = IR (inherent risk) x CR (control risk) x DR (detection risk)

Question 3

what is an inherent risk?

Answer 3

suspectibility of an assertion to a misstatement which could be material. risks that are in the environment of entity. some inherent risk will always exist. ie. cant be avoided

Question 4

what is a control risk?

Answer 4

the risk that a control doesnt pick up a mistake in the financial statements. some control risk will always exist if controls to prevent, detect or correct errors arent good enough

Question 5

what is a detection risk?

Answer 5

risk that auditor misses an error / misstatement

Question 6

what are the two types of detection risk?

Answer 6

• sampling
• non-sampling

Question 7

what is an example of sampling detection risk?

Answer 7

• risk of choosing wrong sample
• consequence of fact that auditor doesnt & cant examine all info

Question 8

what is an example of non-sampling detection risk?

Answer 8

• auditors experience
• time pressure
• financial constraint
• poor planning
• new client
• industry knowledge

Question 9

what is professional skepticism?

Answer 9

need to critically assess financial statements with a questioning mind