4.0 - Audit Risk

Question 1

Auditors follow what kind of approach to auditing?

Answer 1

A risk-bearing approach

Question 2

What happens in the risk-based approach?

Answer 2

Auditors analyse the risks associated with the client’s business, transactions and systems which could lead to misstatements in the financial statements, and direct their testing to risky areas

Question 3

Define audit risk

Answer 3

The risk that the auditor expresses an inappropriate audit opinion when the financial misstatements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk

Question 4

What is the formula for audit risk?

Answer 4

Audit risk = inherent risk + control risk + detection risk

Question 5

What are inherent risk and control risk collectively known as?

Answer 5

Risk of material misstatement

Question 6

What is risk of material misstatement dependent on?

Answer 6

Dependent on the entity, and is the risk of material misstatements arising in the financial statements

Question 7

What is detection risk dependent on?

Answer 7

The auditor, and is the risk that the auditor will not detect material misstatements in the financial statements