Audit Risk is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. Show Audit Risk is also defined as a function of the risk that the financial statements Responsibility to Detect Fraud or Errors AU-C 240.05 An auditor conducting an audit in Note that the responsibility extends to both errors This responsibility remains despite concealment through employee collusion or management override of the internal control structure (although detection under such conditions is much more difficult and less likely). The auditor should always be alert to the possible existence of material error or fraud. determine a materiality level for the financial statements as a whole for the purpose of:
Risk may be assessed in: quantitative (percentages) or non-quantitative terms (high, medium, low). Control Risk, Detection Risk and Inherent Risk may each be assessed in non-quantitative terms. These risks are the components of Audit Risk that may be assessed in both quantitative terms such as percentages or in non-quantitative terms that rely on the experience, observation, and judgment of the auditor.
AR= IR * CR * DR As inherent risk and control risk increases detection risk will decrease A high risk of material misstatement requires lower Detection Risk so that overall Audit Risk is acceptable
Inherent Risk is the susceptibility of a financial statement assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there are no related controls. Inherent Risk is not directly related to Control or Detection Risk and is uncontrolled by the auditor. Control Risk is the risk that a misstatement that could occur in a relevant assertion and that could be material, either individually or when aggregated with other misstatements, will not be prevented or detected on a timely basis by the entity’s internal control. A lack of segregation of duties would present a Control Risk, as would poor physical access controls to blank check stock. Inherent Risk and Control Risk Inherent Risk and Control Risk are the entity’s risks, that is, they exist independently of the audit of the financial statements. The Standards describe the risk of material misstatement as the auditor’s combined assessment of Inherent Risk and Control Risk The auditor may make separate assessments of Inherent Risk and Control Risk. Detection Risk is the risk that the auditor will not detect a misstatement that exists in a relevant assertion that could be material, either individually or when aggregated with other misstatements. Detection Risk is a function of the effectiveness of an audit procedure and its application by the auditor. Only Detection Risk (unlike Inherent Risk and If the assessed level of Control Risk is increased, the auditor must decrease the acceptable level of Detection Risk. This means the auditor would have to perform more substantive testing to offset the decreased reliability of internal control. Detection Risk relates to the substantive audit procedures and is managed by the auditor’s response to risk of material misstatement. The risk of material misstatement and Detection Risk are inversely related; The greater the risk of material misstatement, the less the Detection Risk that can be accepted by the auditor. The higher the risk of material misstatement, the lower the Detection Risk must be, and the more Misstatements may be of two types: Known and Likely
When the auditor encounters evidence of potential fraud, regardless of its materiality, the auditor should consider the implications for the integrity of management or employees and the possible effect on other aspects of the audit. When fraud is detected, the auditor should be concerned about the integrity of management or employees and the possible effect on the other aspects of the audit. Materiality limits do not apply when obtaining written client representations regarding instances of fraud involving management. Detection Risk is the risk that the auditors fail to detect a material misstatement in the financial statements. Misapplication or omission of critical audit procedures may result in a material misstatement remaining undetected by the auditor. Some detection risk is always present due to the inherent limitations of the audit such as the use of sampling for the selection of transactions. Detection risk can be reduced by auditors by increasing the number of sampled transactions for detailed testing. Risk Discussion with Audit Team
The primary responsibility for the prevention and detection of fraud is given primarily to those charged with governance and management. Management, with the oversight of those charged with governance, must place an emphasis on fraud prevention. The internal auditor's responsibility comes into play for the detection of fraud, not its prevention. The following information s/b documented in w/p
Will Internal Control detect
error or fraud? Which transactions have a higher level of risk? Will the auditor fail to detect a material misstatement?
Detection Risk decreases (Increasing AR = IR x CR x Increasing DR)
Increasing AR = IR x CR x Increasing DR Quantitative Measurements Inherent, Control, and Detection Risk can all be measured in terms of percentages Non-Quantitative Measurements Inherent, Control, and Detection Risk can all be measured in terms of acceptable ranges Control Risk is the risk of a material misstatement in the financial statements arising due to absence or failure in the operation of relevant controls of the entity. Control risk is considered to be high where the audit entity does not have adequate internal controls to prevent and detect instances of fraud and error in the financial statements. Assessment of control risk may be higher for example in case of a small sized entity in which segregation of duties is not well defined and the financial statements are prepared by individuals who do not have the necessary technical knowledge of accounting and finance. The risk of incorrect acceptance is the risk of accepting a population as being materially correct when in fact it is materially misstated Which of the following audit risk components may be assessed in non quantitative?Control Risk, Detection Risk and Inherent Risk may each be assessed in non-quantitative terms. These risks are the components of Audit Risk that may be assessed in both quantitative terms such as percentages or in non-quantitative terms that rely on the experience, observation, and judgment of the auditor.
Which of the following audit risk components may be assessed in qualitative terms?Which of the following audit risk components may be assessed in qualitative terms? Both risk of material misstatement and detection risk.
What are the 4 types of audit risk?Types Of Audit Risks. Meaning and Definition Of Audit Risks. ... . Types of Audit Risks. ... . Inherent Risk. ... . Detection Risk. ... . Control Risk.. Which of the following is a component of audit risk?Hence, audit risk is made up of two components – risks of material misstatement and detection risk. Risk of material misstatement is defined as 'the risk that the financial statements are materially misstated prior to audit.
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