Audit Risk - YouTube

insight into auditing

overview of audit risk

what is an audit risk

audit risk is the risk that an auditor expresses an inappropriate audit

opinion on the financial statements that contain certain material misstatements

in other words, it is the risk that auditor fails to express an appropriate

audit opinion in an audit assignment

components of audit risk are, 1. Inherent risk, 2. Control risk,

3. detection risk. Combined level of inherent risk and control risk is also

known as financial statement risk. Mathematically, audit risk is a product

of inherent risk, control risk and detection risk.

therefore, we can say that audit risk equals to inherent risk multiply

control risk multiply detection risk

talking about risk, audit risk and detection risk are related with the

auditor and dependent on the audit procedures applied by the auditor during

the course of audit. Whereas, inherent risk and control risk are related with

the management and these risks are independent to the auditor.

Audit Risk Process, as discussed earlier audit risk is a product of following

three risks, audit risk which the auditor sets is

acceptable low level for the audit inherent risk which is inherited risk of

event or process auditor assesses the inherent risk control risk which is

related with the internal controls designed and implemented by the

management auditor assesses the control risk detection risk which is related

with the audit procedure adopted by the auditor auditor plans the acceptable

level of detection risk

inherent risk and control risk is also called financial statement risk

and these risks are related to risk of material misstatement

understanding of audit risk in any event or process inherent risk

implies the total error or misstatement available prior to applying any control

measure out of total error or misstatement some

error or misstatement are caught by the internal controls designed and

implemented by the management out of remaining error or misstatement

some error or misstatement are caught by the audit procedure of the auditor

the remaining undetected residual error or misstatement is the audit risk of the

assignment

let's have a look at the pictorial elaboration of the concept

let's consider events or processes of a beaker and element inside beakers error

or misstatement due to inherent risk let's consider controls implement it

through internal controls as first infuse a silo and all these procedures

applied by the auditor as a second silo

internal controls are designed and implemented by the management to detect

and prevent Arizona's statement therefore when controls are applied in

the inherent risk that is when we pass the element of beaker into infuser silo

of internal control it detects errors or miss statement however few errors or

missed statements may be undetected or bypassed the controls think that

material errors or miss statements are not detected or by passive controls is

called control risk

during the course of audit auditor reviews these events or

processes and order to prepares its audit procedures to get reasonable Apple

assurance that financial statements are free from material misstatement

however some material errors or missed statements may not be detected by the

audit procedures applied by the auditor the risk of failure to detect material

errors or misstatement by the audit procedures is called

detection risk

after the completion of audit assignment whatever undetected residual risks are

left they are called audit risk

you

inherent risk it is also called AR in short form

inherent risk is the susceptibility of an account balance or class of

transactions to misstatements that could be material

individually or when aggregated with missed statements in other balances or

classes assuming that there were no related internal controls

in other words risk that has existed in the absence of any action or control or

modification in the event

control risk it is also called CR and short form

control risk is the risk that Mis statement either individually or when

aggregated with other misstatement could not be prevented or detected

corrected on timely basis by entities internal control system

in other words it refers to the risk that internal controls fail to detect

the material misstatements

detection risk it is also called dr and short-form

detection risk is the risk that auditors substantive procedures are unable detect

a material misstatement that exists in the financial statements

in other words it is a risk that auditor fails to detect the material

misstatement in the financial statements being audited

interrelationship of the components of auditor East

there is inverse relationship between financial statement risk and detection

risk it means when assess financial statement

risk is high auditors should plan the acceptable level of detection risk below

in contrary when assess financial statement risk is low auditor can plan

to accept high detection risk and still maintain the audit risk to accept ibly

low-level

detection risk matrix auditor plans the acceptable level of detection risk based

on the assessment result of inherent risk and control risk

there are nine scenarios of acceptable level of detection risk

there will be five different acceptable levels of detection risk that is Louis

lower medium higher and highest based on which auditor defines substantive audit

procedure to be applied during the course of audit

response to assess risk let's take two scenarios for discussion

one if there is high inherent risk and high control risk auditor should

maintain lowest detection risk in order reduce the audit risk to accept ibly low

level - if there is low inherent risk and low

control risk order taken accept highest detection risk by maintaining audit risk

to accept ibly low level

sufficient appropriate audit evidence amount of required audit evidence to

qualify as sufficient appropriate audit evidence is based on assessment of

financial statement risk and plan detection risk of an auditor

nine scenarios based on the level of financial statement risk and plan

detection risk on an auditor those are

you

in a nutshell we can say that

audit risk refers to the risk that in order to express is an inappropriate

oddity opinion when the financial statements are materially misstated

all that risk is the product of inherent risk control risk of detection risk

audit risk refers to residual risk which is not detected by the internal control

and audit procedures there is inverse relationship between

detection risk and combined level of inherent risk and control risk

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