Workshop 4 - Audit Risk

Question 1

What is audit risk?

Answer 1

Risk that an auditor expresses an inappropriate audit opinion when financial report is materially misstated.

Question 2

What is the audit risk model?

Answer 2

AR = IR + CR + DR
DR = AR/(RRM = IR + CR)

Question 3

What is inherent risk?

Answer 3

Identification of accounts and related assertions most at risk of material misstatement.

Question 4

What is control risk?

Answer 4

Gaining an understanding of the client’s internal controls and how they will prevent or detect a misstatement.

Question 5

What is detection risk?

Answer 5

Risk that the auditor’s testing procedures will not be effective in detecting material misstatement should there be one.

Question 6

What is the relationship between detection risk and material misstatement?

Answer 6

Inverse relationship.

Question 7

What will occur to the detection risk if there is an increased amount of evidence collected?

Answer 7

There will be a decrease in the detection risk.

Question 8

What are the stages in audit risk minimisation?

Answer 8

1. Assess inherent risk
2. Assess control risk
3. Auditor plans to undertake detailed testing of each identified account.

Question 9

How to achieve a low detection risk?

Answer 9

Perform more rigorous substantive testing.

Question 10

What are the limitations of the audit risk model?

Answer 10

Inherent risk is difficult to formally assess.
Audit risk is judgementally determined
Model treats each risk component as separate and independent when in fact, this is not the case
Audit technology is not so precise that each component of the model can be accurately assessed.

Question 11

What is qualitative materiality?

Answer 11

Refers to the nature of the item.

• Fraud
• Non-compliance with laws
• Related party transactions
• Change of accounting methods

Question 12

What is quantitative materiality?

Answer 12

Refers to the magnitude of the item.

- Set as a % of relevant base.

Question 13

How do auditors set planning materially?

Answer 13

Set initially for the statements as a whole. Then allocate to individual accounts based on their susceptibility to misstatement.

Question 14

What is the purpose of performance materiality?

Answer 14

Assess the risk of material misstatement and determine the nature, timing and extent of further audit procedures.

Question 15

What is the purpose of planning an audit to a financial report?

Answer 15

Enable the auditor to obtain sufficient appropriate evidence
Keep audit costs reasonable
Avoid misunderstandings with the client

Question 16

When will an auditor reduce their reliance on substantive testing?

Answer 16

When IR and CR are low and their is an increased reliance on the tests of controls.

Question 17

What are analytical procedures and when can they be conducted throughout the audit process?

Answer 17

Evaluation of financial information by studying plausible links among both financial and non-financial data.
They can be conducted throughout the audit.