2. Audit Risk (AU-C 200)

Question 1

Define “Audit Risk”.

Answer 1

The risk that the auditor expresses an inappropriate audit opinion when the FS are materially misstated.

Question 2

Audit risk is a function of what 2 things?

Answer 2

1. the risks of material misstatement

2. detection risk

Question 3

Define “risk of material misstatement”.

Answer 3

The risk that the FS are materially misstated prior to the audit.

Question 4

What are the 2 components of material misstatements?

Answer 4

1. inherent risk
2. control risk
   Both are controlled by the entity not the auditor.

Question 5

Define detection risk.

Answer 5

The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

Question 6

Define control risk.

Answer 6

The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either 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.

Question 7

Define Inherent risk.

Answer 7

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Question 8

Define substantive procedures.

Answer 8

An audit procedure designed to detect material misstatements at the assertion level. It comprise tests of detail and substantive analytical procedures.

Question 9

What is the equation for audit risk?

Answer 9

audit risk = inherent risk x control risk x detection risk

Question 10

What is the difference between inherent and control risk vs detection risk?

Answer 10

inherent and control risk exist independently of the audit.

Question 11

What does detection risk relate to?

Answer 11

the effectiveness of the auditor’s procedures.

Question 12

Audit risk, which may be assessed in quantitative or nonquantitiative terms, consists of what 2 things?

Answer 12

1. the risk that an account and its related assertions contains material misstatements (composed of 2 components, referred to as inherent and control risk)
2. the risk that the auditor will not detect such misstatements (referred to as detection risk)