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Auditing ACN-403 students

School of Business

Spring 2011

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Audit Risk

Question:1. What is Risk in Audit?

Question : 2. What is meant by assurance if there is any Risk?

Question : 3. Describe different Types of Audit Risk?

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Audit Risk

The standard audit report explains that the audit is designed to obtain reasonable – not

absolute –assurance that the financial statements are free of material misstatement.

Since the audit does not guarantee that the financial statements are free of material misstatement , some degree of risks exists at the financial statements may contain misstatement that go undetected by the Auditor.

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Topic One

Students should note that it is important to determine materiality , before making decisions about audit risks and its components.

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Audit Risk

SAS 47 (AU 312 .02 ) , Defines, Audit Risk and Materiality in Conducting the Audit,

“Audit Risk is the Risk that the auditor may unknowingly fail to appropriately modify his / her opinion on financial statements that contain a material misstatement”

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Audit Risk

The interpretation of the above definition is:

If the auditor interprets reasonable assurance as a 99% level of certainty that the financial statements are free of material misstatement, then Audit Risk is 1%. , where as 95% certainty is considered satisfactory , then audit risk is 5%. Think , another example,

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Audit Risk

Usually professional judgments regarding reasonable assurance and the overall level of audit risk are set as a matter of audit firm policy , and audit risk will be comparable from one audit to another.

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Audit Risk

An effective auditor recognizes that risks exists and deals with those risk in an appropriate manner. Most Risk auditors encounter are difficult to ensure and require careful thought to respond to appropriately , For example, assume, the auditor determines that the clients industry is undergoing significant technological changes that affect both the client and client ‘s customers.

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Audit Risk This change may affect the obsolesce of the

clients inventory , collectibility of accounts receivable, and perhaps even the ability of clients business to continue. Responding to these risks properly is critical to achieving a high-quality audit.

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Audit Risk

The ultimate challenge of the audit is that auditors can not examine all possible evidence regarding every assertion/statement for every account balance and transaction class. The audit risk model guides the in the collection of audit evidence , so that the auditor achieves the desired level of .

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What is acceptable audit risk?

Acceptable Audit Risk is a measure of how willing the auditor is to accept that Financial Statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. When an auditor decides on a lower acceptable risk, it means the auditor wants to be more certain that the financial statements are not materially misstated

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Acceptable Audit Risk Zero risk would be certainty, and a 100 percent

risk would be complete uncertainty. Complete assurance ( Zero risk) of the accuracy of the financial statement is not economically practical .

Often, auditors refer to the terms : Audit Assurance, overall assurance or level assurance instead of acceptable audit risk. Audit Assurance or any other equivalent terms is the compliment of acceptable Audit Risk, that is one minus acceptable audit risk. For Example: Acceptable Audit Assurance of 2 percent is as the same as Audit Assurance is 98 percent.

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Account Balance

Definition The amount of money in an

account, equal to the net of credits and debits at that point in time for that account. also called balance.

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Account Balance

The amount available in an account. Simply put, the account balance is the net of all credits less all debits. A positive account balance indicates the account holder has funds available to him/her, while a negative balance indicates the holder owes money.

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Account Balances

Account balances are important in banking because they determine whether or not an account holder has money for living expenses and in margin accounts because they show whether the holder can conduct more margin transactions.

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Account balance

Account balance. Your account balance is the amount of money you have in one of your financial accounts. For example, your bank account balance refers to the amount of money in your bank accounts.

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Account Balance

Your account balance can also be the amount of money outstanding on one of your financial accounts. Your credit card balance, for example, refers to the amount of money you owe a credit card company.

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Account Balance

With your 401(k), your account balance, also called your accrued benefit, is the amount your 401(k) account is worth on a date that it's valued. For example, if the value of your account on December 31 is $250,000, that's your account balance.

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Account Balance

You use your 401(k) account balance to figure how much you must withdraw from your plan each year, once you start taking required distributions after you turn 70 1/2. Specifically, you divide the account balance at the end of your plan's fiscal year by a divisor based on your life expectancy to determine the amount you must take during the next fiscal year.

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