AUDIT RISK

AUDIT RISK
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
Audit Risk is the inverse concept of Reasonable Assurance
RISK OF FRAUD
FRAUD DEFINITION
Fraud is an intentional act that results in a material misstatement in
financial statements that are the subject of an audit.
Fraudulent Financial Reporting
Misappropriation of Assets
 RISK FACTORS RELATED
Economic andTO FRAUD
Industry condition,
Incentives/ Pressures pressure from third party, financial
performance.
Layoffs, changes to benefit plans,
Opportunity
inconsistent rewards
Highly complex transaction, significant
estimation, significant related party
Attitudes/ Rationalization transaction .
Large amounts of cash, easily
Less priorityassets
convertible on the entity’s value, highly
participation of nonfinancial
management in the selection of
significant estimation.
Less monitoring, internal control, or
reducing risks related to asset
misappropriation
AUDITING FOR FRAUD
Risk assessment procedure: making inquiries of management,
consider any unusual or unexpected relationship identified
by AP, consider other information obtained while planning
the audit.
Brainstorming Session
Specific Risk
AUDIT RISK
Audit Risk Model
AR = IR x CR x DR
DR = AP x TD
AR = IR x CR x AP x TD
DR = AR
IR x CR
TD = AR
IR x CR x AP
 INHERENT RISK
The susceptibility of an assertion to a material misstatement, assuming
that there are no controls
Consideration
- Pervasive Effect on the Financial Statements
- Related only to a specific assertion for a specific account
SIGNIFICANT INHERENT RISK
Ex: risk of fraud; recent economic or accounting
that require special attention; or a complex
transaction.
The auditor should respond: assessing IR as
maximum for relevant assertions; obtaining
evidence about the effectiveness of IC related to
the assertions; ensuring that the evidence is
obtained during the current audit period; and
obtaining significant evidence through test of
details.
CONTROL RISK
The risk that a material misstatement that could
occur in an assertion will not be prevented or
detected on a timely basis by the entity’s internal
control
Function of the effectiveness of internal control
DETECTION RISK
The risk that the auditor will not detect a material
misstatement that exist in an assertion
The combination of Analytical Procedure Risk and Test
of Detail Risk (both are function of procedures and their
application by the auditor)
Can be changed by varying the nature, timing, and
extensive tests or audit staffing associated with
substantive tests performed on an assertion
PRELIMINARY
AUDIT
STRATEGIES
 COMPONENTS
1. The assessed level of inherent risk
2. The planned assessed level of control risk, considering:
- The extent understanding of internal control
- Test of control to be performed
3. The planned assessed level of analytical procedure risk,
considering:
- The extent understanding of the business and industry
- Analytical Procedures to be performed
4. The planned level of detail tests, with combine with other
procedures, reduces audit risk to an appropriate level
PRELIMINARY AUDIT STRATEGIES
Response to Lower Inherent Risk
A Lower Assessed Level of Control Risk Approach
Primarily Substantive Test Approach
 A PRIMARILY SUBSTANTIVE APPROACH
Use a planned assessed level of analytical procedures risk
at a high level
Use a planned assessed level of control risk at a high level
Plan to obtain a minimum understanding of relevant
internal control
Plan few, if any, tests of control
Plan extensive substantive tests of transactions and
balances based on a low planned acceptable level of
detection risk
 A LOWER ASSESSED LEVEL OF CONTROL
RISK

Use a planned assessed level of analytical procedures

risk at a high level
Use a planned assessed level of control risk at moderate
or low
Plan tests of control
Plan restricted substantive tests of transactions and
balances based on a moderate or high planned acceptable
level of detection risk
 RESPONSE TO LOWER IR
Inherent risk is assessed below the maximum
Use a planned assessed level of analytical procedures risk
as a low as feasible
Use a planned assessed level of control risk at a high level
Plan to obtain a minimum understanding of relevant
internal control
Plan few, if any, tests of control
Plan less extensive substantive tests of transactions and
balances as a result of risk reduction from lower inherent
and analytical procedures risk