Week 3 - Audit Risk

Question 1

How does ISA200 define audit risk?

Answer 1

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated

Question 2

What are the possible repercussions of giving a wrong opinion?

Answer 2

• business makes decision
• shareholders invest incorrectly (make wrong economic decisions)
• you could be sued

Question 3

How can audit risk be managed?

Answer 3

• increased supervision
• consistent reviewing
• increase sample sizes

Question 4

Audit risk is not the same as…

Answer 4

Business risk

Question 5

What is the symbol formula for audit risk?

Answer 5

AR = IR x CR x DR

Question 6

What is the word formula for audit risk?

Answer 6

Audit risk = inherent risk x control risk x detection risk

Question 7

Define audit risk in the formula

Answer 7

The risk of an incorrect audit opinion

Question 8

Define inherent risk

Answer 8

Risks which derive from the nature of the entity itself, its business and from the business and commercial environment it operates in

Question 9

Define control risk

Answer 9

The risk that the client’s internal control procedures will fail to detect a material error or misstatement

Question 10

Define detection risk

Answer 10

The risk that the auditor’s own procedures and review of the financial misstatements will not detect material errors or misstatements