Question

• What is audit risk?
• What is the Audit Risk Model?
• What are the components of audit risk and how do these relate to each other?
• How does materiality and the audit approach interact with the Audit Risk Model?

Answer 1

1. Audit risk is the risk that the auditor fails to give appropriate opinion on the financial statements when the financial statements are material misstated. It means Auditor is unable to ascertain the material misstatements in the financial statements .

2. Audit risk model is a tool, technique used by auditor to understand the relationship of various risk like inherent risk, control risk, detection risk with  overall risk for carrying futher substantive procedures .

3.Audit risk has three components

a.Inherent Risk :susceptiblity of class of transactions or account balances to a material misstatement,assuming there were no internal controls.

b.Control Risk : risk that material misstatement will not be prevented, detected and corrected on time by the internal control system

c.Detection Risk: risk that the procedures performed by the auditor fails to detect material misstatement.

There is a inverse relation between detection risk and combined level of inherent risk and control risk. When internal and control risk are high the auditor needs to consider whether procedures can provide sufficient appropriate audit evidence to reduce detection risk and vice versa.

4. Materiality level in a financial statements plays an important role. It intracts with audit risk model or approaches when auditor determines that material misstatements of account balances or transactions cannot be reduced to acceptable level or cannot be detected by applying the substantive procedures, auditor should express a qualified or disclaimer opinion as he may decide and consider appropriate