Audit Risk

Question 1

What is audit risk

Answer 1

Audit risk is the risk that the auditor does not pick up any material frauds or errors

To measure this the audit risk model is used

Question 2

What different risks are there

Answer 2

Company:
Inherent risk
Control risk

Audit firm:
Detection risk

Question 3

Inherent risk

Answer 3

This can arise from company/ industry level issues like

Integrity of management
Management experience
High staff turnover/ low morale
Pressures on management
Problems with business/industry

Also can arise from nature of accounting balances

Accounts history of error/ misstatement
Complex accounting
Assets at risk of theft/ loss
High volumes of transactions
Unusual transactions

Question 4

Control risk

Answer 4

Gain understanding of clients controls over information systems relevant to financial statements

Assess the effectiveness of those controls and test those controls and test those controls and if they can rely on those controls it will reduce detection risk

Question 5

Detection risk

Answer 5

The levels of tests to carry out based on inherent and control risk

Question 6

Audit responses

Answer 6

Testing all the individual material items
Emphasising the need for professional scepticism
Assigning more experienced staff
Providing more supervision
Performing more substantive procedures
Consulting external experts