Risk Flashcards
What are the main types of risk
Business risk
Audit risks
Risk of material misstatement
What is business risks
Business risks Results from significant conditions, events, circumstances, actions or actions that could adversely affect the entities ability to achieve this objective and execute a It strategies
What are the four main categories of business risk
Strategic risk - competition
Financial risk - high borrowing or increase interest rates
Operational risk - day to day running eg faulty products and loss of reputation
Compliance risk - failure to comply with regulations
Why is business risk important auditors
It is not the orders his duty to manage the risk of a business Or even warn the clients about business risk so therefore why is it important to auditors?
It is important because business risk will often influence inherent risk. If misstatements which are not prevented or detected and corrected by internal controls (control risk) are not detected by the auditor (detection risk), the auditor will express an inappropriate opinion (audit risk)
What is audit risk
Odd risk is the risk that the financial statements contain a material misstatement that the auditors have not discovered. This could therefore result in an inappropriate opinion.
What are the three Components of audit risk
Inherent risk-the risk of an error occurring in the first place without any controls being present
Control risk-the risk that the entities control procedures do not prevent, detect and correct the error
Detection risk-the risk that audit procedures do not discover the error
What are the two components Of detection risk
Sampling risk-this arises when all the procedures are applied to samples rather than entire populations
Nonsampling risk-this risk arises from reasons other than sample size. For example if the audit staff were inappropriately qualified there is a higher risk that they may use inappropriate audit procedures or fail to recognise an error
