Lecture 5 - Risk

Question 1

What are the main components of Audit Risk?

Answer 1

AR= IH x CR x DR

Engagement risk
Independence risk

Question 2

Which risks belong to the client?

Answer 2

Inherent risk

Control risk

Question 3

What is Inherent risk?

Answer 3

The risk relating to the entity and the environment in which it opperates

Question 4

What is Control risk?

Answer 4

The risk that a material misstatement will not be prevented, detected or corrected

Question 5

What is Detection risk?

Answer 5

The risk that the auditor will not detect a material misstatement

Question 6

What is business risk?

Answer 6

The risk that the business will not meet its objectives

E.g. Fail to meet profit targets, increase market share, liquidity

Question 7

What is the standard for Analytical Review that makes it compulsory?

Answer 7

ISA 520

Question 8

What is the standard for letters of engagement?

Answer 8

ISA 210

Question 9

What is the main content of letters of engagement?

Answer 9

1. Clear statement of the respective duties of directors and auditors
2. Scope of audit clarified
3. Basis on which fees are charged
4. Circumstances why the auditor will need to report to 3rd parties and breach confidentiality e.g. Money laundering
5. Disclaimer of 3rd party liability

Question 10

What is the summery of the audit process?

Answer 10

1. Appointment and Letter of Engagement (ER)
2. Analytical review of industry and risk (IR)
3. Evaluation of accounting systems / internal controls (CR)
4. Testing and gathering evidence (DR)
5. Completion and review
6. Audit reporting and signing