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    AA - Planning & Risk Assessment

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    Syamkrishnan
    Audit risk is the risk that a material misstatement exists in the financial statements that is not identified by the auditor. It is calculated using the audit risk model: AR=IR*CR*DR. IR is inherent risk, CR is control risk, and DR is detection risk. IR and CR cannot be changed, but influence the level of DR - the higher the IR and CR, the lower the DR needs to be through more audit procedures, time, larger samples, and experienced staff. A correctly assessed audit risk results in an appropriate audit opinion.

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    AA - Planning & Risk Assessment

    Uploaded by

    Syamkrishnan
    69 views2 pages
    Audit risk is the risk that a material misstatement exists in the financial statements that is not identified by the auditor. It is calculated using the audit risk model: AR=IR*CR*DR. IR is inherent risk, CR is control risk, and DR is detection risk. IR and CR cannot be changed, but influence the level of DR - the higher the IR and CR, the lower the DR needs to be through more audit procedures, time, larger samples, and experienced staff. A correctly assessed audit risk results in an appropriate audit opinion.

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    AA_01_Audit_Risk_notes.pdf

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    Audit risk is the risk that a material misstatement exists in the financial statements that is not identified by the auditor. It is calculated using the audit risk model: AR=IR*CR*DR. IR is inherent risk, CR is control risk, and DR is detection risk. IR and CR cannot be changed, but influence the level of DR - the higher the IR and CR, the lower the DR needs to be through more audit procedures, time, larger samples, and experienced staff. A correctly assessed audit risk results in an appropriate audit opinion.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    69 views2 pages

    AA - Planning & Risk Assessment

    Uploaded by

    Syamkrishnan
    Audit risk is the risk that a material misstatement exists in the financial statements that is not identified by the auditor. It is calculated using the audit risk model: AR=IR*CR*DR. IR is inherent risk, CR is control risk, and DR is detection risk. IR and CR cannot be changed, but influence the level of DR - the higher the IR and CR, the lower the DR needs to be through more audit procedures, time, larger samples, and experienced staff. A correctly assessed audit risk results in an appropriate audit opinion.

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    © All Rights Reserved
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    AA - Planning & risk assessment

    Audit Risk

    TERMINOLOGY USED:

    Audit risk is the risk of the auditor giving an inappropriate opinion on the financial statements, i.e. there are
    material misstatements present in the financial statements.

    Misstatement is:

    1) a difference between the amount, classification, presentation or disclosure of a reported financial statement
    item; and the amount, classification, presentation or disclosure that is required for the item to be in
    accordance with the applicable financial reporting framework (ISA 450);
    2) the difference between what is in the financial statements and what should be in the financial statements in
    accordance with the applicable financial reporting framework.

    Note: Material misstatement not identified by the auditor leads to incorrect decisions made by users and affects
    the auditor’s reputation.

    AUDIT RISK MODEL:

    In order to calculate audit risk, the auditors use the audit risk model: AR=IR*CR*DR, where:
    AR - Audit risk;
    IR - Inherent risk - is the risk of a material misstatement in the financial statements due to the nature of the
    client, whether it be the business itself or the industry which they operate within;
    CR - Control risk - is the risk of a material misstatement in the financial statements due to poor client controls;
    DR - Detection risk - is the risk of a material misstatement in the financial statements due to the auditor not
    spotting the error.
    Note: Inherent risk and Control risk cannot be changed, but must be identified to decide what should be the level
    of Detection risk.
    If Inherent risk and Control risk are high, then Detection risk must be low, meaning that:
    - More audit procedures would be needed;
    - More time should be spent on the audit;
    - Sample sizes should be increased;
    - More experienced audit staff should be used.

    If Inherent risk and Control risk are low, then Detection risk can be high, meaning that:
    - Smaller samples of transactions can be tested;
    - Less time will be spent on the audit.

    If audit risk is assessed correctly, the audit opinion will be appropriate at the end of the process.

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