Risk Assessment Flashcards
Intro to risk assessment
Relates to uncertainty and potential loss
Risk is a central concept in audit
A risk assessment helps the auditor to identify financial statements area susceptible to material misstatement
A risk assessment provides the basis for designing and performing audit procedures
Professional scepticism and professional judgement
Auditors are required to carry out the audit with an attitude of professional scepticism, exercise professional judgement and comply with ethical requirements
Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicte possible misstatements due to Fraud or error and a critical assessment of audit evidence
Professional judgement is the application of relevant training, knowledge and experience in making Informed decisions about the courses of action that are appropriate in an audit
Audit risks
The main types of risks in an assurance engagement:
Audit risk - which is represented by;
Inherent risk
Control risk
Detection risk (sampling and non sampling risk)
Audit risk is
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the fs are materially misstated
Audit risk is a function of the risk of material misstatement (inherent and control risk) and the risk that the auditor will not detect such misstatement (detection risk)
Audit risk = inherent risk * control risk * detection risk
Inherent risk
Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or disclosure to a mistatemwnr thag could be material either individually or when aggregated with other misstatements, before consideration of any related internal controls
Inherent risk is affected by the nature of the entity, it’s strategy and its environment
Control risk
Control risk is the risk that a material misstatement thag could occur in a n assertion about a class of transaction, account balance, or disclosure and thag 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 controls
Detection risk
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptable low level will not detect a misstatement that exists and thag could be material either individually or when aggregated with other misstatements
One way to decrease detection risk is to increase sample sizes
Materiality
Determining materiality for the fs as a whole involves the exercise of professional judgement
Generally a % is applied to a chosen benchmark eg 5% of profit before tax
Performance materiality
Performance materiality is the amount set by the auditor at less than materiality for the fs as a whole to reduce to an appropriate low level the probability thag the aggregate of uncorewctd and undetected misstatements exceeds the materiality level for the fs as a whole
Materiality levels must be revised during the audit mission if new evidence surface thag affects the initial judgement
Understanding the entity and it’s environment
The auditor is required to obtain an understanding of the entity and its environment in order to be able to assess the risks of material misstatements
Sources of info:
Previous years audit file
Clients website
Publications or websites related to the industry in which client operates
Enquiries of management, internal auditors and others in the entity
Analytical procedures - evaluations of financial information
Observation and inspection
Responding to the risk assessment
Tests of controls - are audit procedures designed to evaluate the operating effectiveness of controls in preventing, or Detecting and correction, material misstatements at the assertion level
Substantive procedures - are audit procedures designed to detect material misstatements at the assertion level. They consist of tests of details ( of classes of transactions, account balances and disclosures) and substantive analytical procedures
