Audit Risk

Question 1

What are the three risks?

Answer 1

Control
Inherent
Detection

Question 2

What is one of the overriding principals in relation to risk?

Answer 2

ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with ISAs
One of the overriding principles:
‘To obtain reasonable assurance, the auditor shall obtain sufficient appropriate evidence to reduce audit risk to an acceptably low level….’
Audit risk is the risk that the auditor expresses an inappropriate audit opinion
ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment

Question 3

What is the risk assessment as part of an audit?

Answer 3

‘Professional scepticism’

“An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence” (ISA 200)
Must also use professional judgement (application of relevant training, knowledge and experience in making informed decisions about the courses of action that are appropriate to the unique circumstances of the audit engagement)

Question 4

Why is it important to understand the entity and its environment?

Answer 4

“KOB” (Knowledge of the Business), includes:
Relevant industry, regulatory and other external factors (including FR framework)
Nature of the entity
Entity’s selection and application of accounting policies
Entity’s objectives, strategies and related business risks
Measurement and review of entity’s financial performance
Internal controls relevant to the audit

ISA 315 Identifying and Assessing the Risks of Material Misstatement…)
Used to identify risks that the business is exposed to

Question 5

What are the sources of information?

Answer 5

Understanding the entity
Information from your firm
Information from you
Information from external sources
Information from the client

Question 6

What is the risk assessment procedure?

Answer 6

ISA 315 requires auditors to perform the following procedures to understand the entity and its environment:
Enquiries with management and others within the client entity (eg, about external and internal changes the company has experienced)
Analytical procedures
Observation (eg of control procedures) and inspection (eg of key strategic documents and procedural manuals).

Question 7

What are analytical procedures?

Answer 7

Fundamental to auditing process
Used in planning, performance and review
Defined in ISA 520 Analytical Procedures as:
“The evaluation of financial information through analysis of plausible relationships among both financial and non-financial data”
Incorporate the comparison of:
Current and prior year figures
Current and budgeted/forecast figures
Client and industry average figures
At planning stage – useful for helping to gain an understanding of client’s performance over last 12 months and to identify any significant changes to the business

Also used to identify peculiar deviations that could indicate misstatement in reported figures.

Must then be investigated during final audit procedures

More recently, computer aided auditing techniques used to perform data analysis