MODULE 6

AUDIT RISK

CA. SRIPRIYA KUMAR

Practical/ Article Training

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LEARNING OBJECTIVES

What is Audit Risk

Components of Audit

Risk

Model for Audit Risk Illustration

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AUDIT RISK – RISK OF INCORRECT OPINION

• Unqualified (clear) opinion where qualification is necessaryA

• Qualified opinion where such qualification is not necessary B

• Ommission of Emphasis in audit reportC

• Providing an opinion although there was a scope limitationD

AUDIT RISK

Inherent Risk

Control Risk

Detection Risk

AUDIT RISK

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AUDIT RISK

Audit Risk = Inherent

Risk X Control Risk X Detectio

n Risk

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INHERENT RISK

Inherent Risk is the risk of a material misstatement in the financial statements

arising due to error or omission as a result of factors other than the failure of controls.

Examples include

Involvement in complex financial market

transactions

Newly formed entity in a complex business

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CONTROL RISK

Control Risk is the risk of a material misstatement in the financial

statements arising due absence or failure of controls. Examples include

No segregation of duties Key positions manned by unqualified personnel

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DETECTION RISK

This is the Residual Risk

Can never be zero as audit evidence is persuasive rather than conclusive.

Can be reduced by auditors by increase in sample size

The risk that the auditors fail to detect a material misstatement in the financial statements

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AUDIT RISK

Audit Risk = Inherent

Risk X Control Risk X Detectio

n Risk

AUDIT RISK – “MATERIAL” MISSTATEMENT

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IMPORTANCE OF MATERIALITY – SA 320

Misstatements, including omissions, are considered to be material

if they, individually or in the aggregate, could

reasonably be

expected to influence the economic decisions

of users taken on

the basis of the financial statements

Materiality in Planning and Performing an Audit

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SOME ILLUSTRATIONS OF MATERIALITY

Errors which account for a significant

percentage of the profit/ loss as reported

Errors causing a profit to be shown as a loss

or vice versa

Statutory Compliance violations

Vitiation of the going concern assumption

Error impacting the decision of user of the Financial Statement:

WHAT NEXT? WHAT DO I DO?I understand Audit Risk!

THANK YOUPractical/ Article Training