Chapter 5 - Risk Flashcards
(13 cards)
What are the elements of audit risk?
Inherent risk * Control Risk * Detection Risk
Which are the risk/s that the auditor has control over?
Detection risk only
What is the definition of Inherent Risk?
The susceptibility of an assertion about transactions, balances or disclosure to a misstatement that could be material, before consideration of any related internal controls.
What is the definition of Control Risk?
the risk that a misstatement is not prevented, detected or corrected by the entity’s controls
3 levels of IR:
What is the definition of Control Risk?
the risk that the procedures performed by the auditor do not detect a misstatement that exists and could be material. Detection risk is made up of sampling and non-sampling risk.
Detective risk is made up of sampling and non-sampling risk. What are these?
Sampling risk – risk that the conclusion drawn from the results of a sample test is different from the conclusion that would have been drawn had the whole population been tested
Non-Sampling risk – risk of drawing the wrong conclusion for other reasons. Including:
Lack of cumulative knowledge and experience
Undue time pressure resulting in the audit being rushed and misstatements not being detected
The client operates from multiple sites, and the auditor may not be able to visit each site during the audit
Risk assessment is comprised of
Audit risk
Materiality
Analytical procedures
Undertsanding the entity
Professional scepticism
If the risk is high, then the following safeguards should be implemented
- Have a team with a high level of knowledge and experience
- Increase the materiality of the audit
- Take a more sceptical approach
- Increased testing
The three levels of Inherent Risk
Industry Level
Entity Level
Balance Level
The accepted benchmarks for materiality
Revenue = 0.5% - 1%
Asstes = 1%-2%
PBT = 5% - 10%
Risk Assessment Procedures
Enquires
Analytical procedures
Observation
Inspection
Analytical Procedures include comparisons of the entity’s financial information with:
Comparable information for prior periods
Anticipated results (budgets and forecasts, and estimated depreciation)
Similar industry information
What is audit risk?
the risk that the auditor expresses an inappropriate opinion on the FS. This can either be a risk of material misstatement or a detection risk.
