Components of audit risk

Question 1

Audit risk

Answer 1

auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

Question 2

function of two main components

Answer 2

being the risk of material misstatement and detection risk. Risk of material misstatement is made up of a further two components, inherent risk and control risk.

Question 3

Inherent risk

Answer 3

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

Question 4

Control risk

Answer 4

the risk that the misstatement is not prevented, detected, or corrected by the entity’s internal control system

Question 5

Detection risk

Answer 5

is the risk that procedures performed by the auditor do not detect a misstatement that exists and could be material and is made up of. Sampling and non-sampling risk.

Question 6

Explain the importance of audit planning

Answer 6

• It helps the auditor to devote appropriate attention to important areas of the audit
• It helps the auditor to identify and resolve potential problems on a timely basis
• Helps auditor to properly organise and manage the audit engagement so that it is performed in an effective and efficient manner
• Assists, where applicable, incoordination of work done by experts.

Question 7

PRECONDITIONS for an audit were present when accepting the

Answer 7

• Preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair representation
• Such internal control as management determines is necessary to enable the preparation of financial statements which are free from material misstatement, whether due to fraud or error.
• To provide auditors with access to all relevant information of the financial statements, any additional information which the auditor may request from management and unrestricted access to personal form the auditor determines necessary to obtain audit evidence.