Risk assessment

Question 1

Business risk

Answer 1

The risk inherent to the company in its operations.

Includes risk at all levels of the business

Question 2

3 general categories of business risk

Answer 2

Financial
Risks arising from the financial activities or consequences of an operation e.g. cash flow issues/overtrading

Operational
Risks arising w regard to operations

Compliance
Risk that arises from non-compliance with laws and regs that surround the business

Question 3

Audit risk

Answer 3

The risk of giving an inappropriate opinion on the FSs

Inherent
Control
Detection

Question 4

Inherent risk

Answer 4

The susceptibility of an assertion to misstatement (that could be material, individually or when aggregated), assuming that there were no related internal controls

Question 5

Control risk

Answer 5

The risk that a misstatement (that could be material, individually or when aggregated with other misstatements), will not be prevented or detected and corrected on a timely basis by the entity’s internal control

Question 6

Limitations of internal controls

Answer 6

Cost > benefit
Routine/non-routine transactions
Human error
Mgmt override
Circumvention by collusion
Changes in procedures

Question 7

Detection risk

Answer 7

The risk that an auditor’s procedures will not detect a misstatement (that could be material, individually or when aggregated with other misstatements)

Question 8

Significant risks

Answer 8

a risk of material misstatement that, in the auditor’s judgement, requires special audit consideration

Question 9

If an auditor decides that an acceptable level of audit risk is x%, what does this mean?

Answer 9

x% chance of an invalid conclusion being drawn after all procedures completed

(100 - x)% confident that audit opinion will be valid

Question 10

Examples of indicators in a business that the risk of fraud and error may be high

Answer 10

Previous experience of integrity or competence of mgmt
Financial reporting pressures (profit-based rewards)
Weaknesses in design or operation of systems
High staff turnover
Industry characteristics eg cash handling
Unusual transactions
Problems in obtaining audit evidence
Inadequate control over IT systems data

Question 11

5 components of internal control

Answer 11

The control environment
Risk assessment process
Control activities
Information and communication
Monitoring activities