business risk Flashcards
why is it important to understand the entity’s objectives, strategy and business model ?
helps to understand entity at strategy level
helps understand business risks
which in turn helps identify risks of MM.
what is business risk
a risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.
identify business risks tips
use exhibit
identify risk and EVALUATE (tell impact)
-focus on significant risks
-focus on thhings uncertain occurence and outcome. not things already happened and quantified.
risk of material misstatements may occur at ___ and ___ levels
financial statement level
or
individual FS assertions
to understand risk at the FS level
the auditor must identify significant classes of transactions and balances in which material misstatements may arise.
to understand risk at the assertion level
assess inherent and control risks
inherent risk factors
-complexity
-subjectivity
-uncertainty
-change
-susceptibility to management bias or other fraud risk factors
spectrum of risk
where does the risk sit on the spectrum
assess likelihood and magnitude
significant risks are those which are at the upper end of the spectrum
audit risk is made of
detection risk + ROMM
romm= control + inherent risk
detection risk
group audits where auditor is reliant on component auditors
new client
Audits where quality management or ethical threats may prevent the auditor from obtaining sufficient appropriate evidence. For example, in specialised industries where the audit team do not have appropriate, specialised competencies or where intimidation or self-interest threats prevent appropriate challenge of management.
lack of professional skepticim increases detection risk
