Risk & the Exam

Question 1

Detection Risk includes situations such as-3

Answer 1

1st year auditing client lack of cumulative knowledge & experience

TIME PRESSURE- from client= a rushed misstatements for unnoticed

MULTIPLE SITES, a not able to visit each =problem If material amount of inventory held there not visited by a

Question 2

AUDIT RISK is risk that

Answer 2

A expresses inappropriate opinion when FS are materially misstated

Question 3

AUDIT RISK = a x b

Define both a & b

Answer 3

Audit risk = risk of material misstatement x detection risk
…
DETECTION RISK - a procedure. To reduce a risk to approp low level fail to detect misstatement that could exist & be material
….
RISK OF MATERIAL MISSTATEMENT
= risk fs misstated PRIOR to audit

Risk material mistatement comprises :
-INHERENT RISK susceptibility of assertion about a class of transactions. A/c bal or disclosure to misstatement (that could be material) prior to consideration of any controls 

• CONTROL RIsK = risk misstatement could occur will not be prevented, detected& corrected timely basis by entity’s int control

Question 4

Fs may be materially misstated. 3 reasons

Answer 4

1 numbers are misstated (eg overstatement. Of receivables due to bad debts not written off)

2 Disclosure inadeq/ missing (eg GConcern disclosure)

3 basis of prep fs inapprop

Question 5

Auditor is required to determine whether any risks are SIGNIFICANT
Signif risk is a..
…
As part of risk assessment process A should consider SIGNIFICANCE of identified risk including …

Answer 5

Risk of material misstatement that requires special audit consideration

….
Degree of Subjectivity involved in measuring financial instruments

Whether risk is
- one of FRAUD

• involves transactions outside normal course of business
• involves RELATED PARTY transactions

Question 6

RESPONSE to ASSESSED RISK

Detection risk can be reduced by-5

Answer 6

Emphasising need for PROF SCEPTICISM

Providing more SUpERVISION

Assigning more EXPERIENCED STAFF to complex/ risky areas of Engagement

Incorporate additional elements of unpredictability in selection of FURTHER PROCEDURES

5 a perform more SUBSTANTIVE TESTING
b consult EXT EXPERT on technically Complex matters

c Change timing & frequency of REViEW PROCEDURES

d place less reliance on results of systems and controls testing