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Audit and Assurance

This document discusses audit risk and types of audit risks. It defines audit risk as the risk that an auditor provides an inappropriate audit opinion when the financial statements are materially misstated. The two types of audit risks are: 1) risk of material misstatement, which includes inherent risk and control risk, and 2) detection risk. Detection risk includes sampling risk and non-sampling risk. The auditor aims to reduce overall audit risk to a low level by considering these various risks in planning and performing the audit.

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Loveleen Garg
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56 views6 pages

Audit and Assurance

This document discusses audit risk and types of audit risks. It defines audit risk as the risk that an auditor provides an inappropriate audit opinion when the financial statements are materially misstated. The two types of audit risks are: 1) risk of material misstatement, which includes inherent risk and control risk, and 2) detection risk. Detection risk includes sampling risk and non-sampling risk. The auditor aims to reduce overall audit risk to a low level by considering these various risks in planning and performing the audit.

Uploaded by

Loveleen Garg
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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AUDIT AND ASSURANCE

ASSIGNMENT

AUDIT RISK AND RISK ASSESSMENT PROCEDURES

B.COM 3 X

2019-20

SUBMITTED TO:

DR. KIRAN SOOD

SUBMITTED BY:-

LOVELEEN

1820993062

CHITKARA BUSINESS SCHOOL

CHITKARA UNIVERSITY
Explain audit risk and also explain types of audit risks.

Ans. Introduction:-

Audit risk is a risk where an auditor for materially misstated financial


statements may provide in the auditor’s report an unmodified audit opinion. The
auditors can never provide an absolute assurance while auditing financial
statements of any company because to provide absolute assurance auditors may
have to check every item of financial statements in detail which is not possible
because it will be like performing all the transactions and events happened
during a year again. Auditors can provide reasonable assurance and in few cases
limited assurance as per the circumstances. An audit is usually done on a sample
basis due to which the risk may not be found only or if found the degree may
not be certain. The auditors usually have a limited time to perform an audit of
the company. So it becomes difficult to assess risk and give an appropriate
solution. There are inherent limitations in audit due to which audit risk may or
may not be ascertained and may lead to an unmodified opinion. Inherent
limitations in an audit are even due to limitations in preparing financial
statements such as few figures are just based on estimations due to the concept
of prudence. Auditors cannot perform an audit with a mindset that risk is
difficult to ascertain due to inherent limitations of an audit. Auditors will have
to plan their audit work so that they can assess all the risky areas. Auditors need
to consider that there can be chances of risk and perform audit accordingly. The
auditors will face challenges in case financial statements are deliberately
concealed. As per the International Standards of Auditing 315, while
understanding the entity, auditors may look for what are the risks? And As per
International Standards of Auditing 330, while planning the audit, auditors need
to think of ways to reduce the risk to a low level. The audit requires auditors to
reduce audit risk to a low level by collect evidence as per requirements. In case
of more chances of risk, the auditors need to collect more evidence to get the
surety or confirmation of the figures presented. Audit risk is a technical term.
An audit requires an auditor to give a true and fair opinion but due to lack of
risk misstatements in financial statements auditor’s opinion may not be
appropriate. Auditors may give true and fair view while there may be an
enormous error in the company’s books.
Audit risk

Meaning:-

Audit risk is the risk that the auditor expresses an inappropriate opinion when
the financial statements are materially misstated. That means auditors give
unmodified opinion while financial statements are materially misstated.

Audit risks are of two types:-

Risk of material misstatement

Detection risk

AUDIT RISK

RISK OF
MATERIAL DETECTION RISK
MISSTATEMENT

INHERENT RISK CONTROL RISK

Risk of material misstatement is of two types:-

Inherent risk

Control risk
Detection risk is of considered of sampling risk and non- sampling risk.

Audit risk –

Inherent risk * Control risk * Detection risk.

RISK OF MATERIAL MISSTATEMENT

Risk of material misstatement is the risk that the financial statements are
materially misstated before an audit. The financial statements can be misstated
due to fraud or error. Fraud is intentionally done by directors by wrongly adding
figures to show high figures. Errors may be an omission of transactions, wrong
entries etc. which can be during the processing of transactions or while
preparing the statements.

A misstatement is a difference that occurs in the amount to be recorded,


classified, presented, disclosure and amount that has been recorded or
presented. It states that the laws required to prepare financial statements have
not complied properly.

Inherent risk

It arises due to errors or fraud in the amounts resulting in a misstatement of


financial statements. It mainly arises due to the size of the organization, nature
of an organization, even the nature of balance also.

Inherent risk few can be due to complex accounting treatment difficult for the
client to understand which may result in an error.

Control risk

Control risk is a risk which is out of the company’s internal control. Company
may not be able to detect this type of risk through internal control. There can be
material misstatement which may not be prevented by the company’s internal
control.
There can be chances of high control risk in the company where internal control
isn’t designed properly. The control may not be applied properly due to
insufficiencies in the circumstances of the business.

DETECTION RISK

Detection risk is a risk where auditors may fail to detect the risk of financial
statements being materially misstated and provide an unmodified opinion. The
auditor performs certain procedures to reduce audit risk to a low level but that
may not always be the case as there is the use of sampling method and even
there is a limitation in auditing and accounting both which affect the audit.

Sampling risk

Sample risk usually risks through the choice of sample. Sometimes auditor may
on basis of check sample and find no fault and give reasonable assurance while
through the missed out documents there may be enormous fraud or error hidden
which auditor may not realize making his opinion inappropriate. In other cases,
it can be auditor checking sample and find faults in all of them and base his
opinion on such judgments while all others documents would be perfectly
correct as per the relevant criteria so here also there is an inappropriate opinion.

Sampling risk is a risk on bases of conclusions drawn by an auditor from a few


samples which may not have been same if the entire population was tested.

Non – sampling risk

It can be a risk where auditor’s opinion is inappropriate but the reason being
other than sampling. It can be due to wrong procedures adopted while carrying
out an audit or detecting the audit risk. It can also be due to lack of proper
planning. The auditors may fail to detect material misstatement in the financial
statements.
Conclusion:-

To get the audit risk at low levels the equation:

(IR * CR) * DR = AR

Then left-hand side equation terms to need to have a low level of risk at least
some of them.

If inherent risk and control risk are high the detection risk needs to be low i.e.
auditors may have been able to detect the risk and provide the correct opinion.

In the case where there can be a chance of inherent and control risk to be low
then there are fewer chances of fraud or error to occur in the financial
statements. In such cases even though detection risk may be high the auditor can
still overall achieve a low level of risk and give an appropriate opinion.

The auditor to reduce the risk may perform some risk assessment procedures
and may plan the audit properly by which he may be able to look deeply into
risky areas and detect the audit risk to reduce the overall level of risk.

The auditor may collect as much evidence required and even look for the
reliability of such evidence by confirming with the other party involved. The
auditor shouldn’t provide any opinion until there is any complete surety on his
path to provide reasonable assurance.

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