Question

Assignment Question(s):​​​​​​(Marks 5)

1- What is Audit risk?

2- What is the role of an Audit committee?

3- Write about Engagement letter and its importance? What is Engagement risk?

4- When an Auditor finds misstatements in entities financial statements which may be the result of fraudulent act, what should be the role of an auditor under that situation?

Answer 1

1) What is Audit Risk?

Ans: Audit Risk is a risk that the financial statement(Balance sheet & Profit and loss account etc.) are materially incorrect, even though report of auditor states that the financial statement are free from material statement. The purpose of an audit is to reduce the audit risk to an appropriate low level through sufficient testing and verification of evidence. Below are the two types of audit Risk

i) Risk of material statement

ii) Detection Risk

2) Role of Audit committee?

Ans:The primary objective of Audit committee is to oversight of the financial reporting process,the audit process, the company system of internal controls and compliance with laws and regulations. Broadly audit committee is responsible for below points:

i) Audit committee is responsible for appointment, compensation and oversight of the work of Auditor's.

ii) When an internal audit function exist, the committee will review and approve the audit scope and plan.

iii) Audit committee meet with internal auditor's and management on a periodic basis to discuss observation/matters of the concern that may rise in the audit.

iv) The committee reviews the result of an audit with management and external auditors.

3) Write about Engagement letter and its importance? What is Engagement risk?

Ans: The purpose of engagement letter is to inform the auditee, of the nature of the work carried out by the auditor and client responsibility under the engagement. Mainly below points will be covered in the engagement letter:

i) It explains the forms of any report to be issued under the engagement.

ii) Scope of work to be involved.

iii) To explain that the work of audit is to be carried out on test basis.

iv) Client duty to provide all necessary information.

v) Basis of charging fees.

vi) Any other special points which auditor feels is require to convey to the clients.

Engagement Risk:

Ans:Engagement risk is the overall risk associated with the audit engagement. Engagement tend to increase when a client is a weak financial condition and its required additional financing in order to survive.In which case client is more likely to go bankrupt and in which case creditor and investor can drag auditor subsequently in the litigation cases. Which can be reputation and financial loss to the auditor.

4) When an Auditor finds misstatements in entities financial statements which may be the result of fraudulent act, what should be the role of an auditor under that situation?

Ans:Below approach should be follow by the auditors in the case of misstatement in entities financial statement:

Following are the auditor's responsibility:

1) Obtain reasonable responsibility that financial statement are free from misstatement.

2) Maintain profession skepticism throughout the audit.

3) Should know that risk of non detection of management fraud is greater than employee fraud.

4) Must be aware risk of non detection of fraudulent material misstatement is higher than misstatement due to error.

Risk assessment procedure:

i) Auditor should obtain below information which is used for risk identification:

ii) Auditor to inquire the management, internal audit team and those charged with governance whether any instance of actual or alleged fraud has occurred in the past and obtain their respective views on the risk of fraud.

iii) Consider whether any other information obtained indicates the risk of fraud.

iv) Identify Unusual or unexpected relationship while performing analytical procedure and evaluate them to assess the risk of material misstatement due to fraud.

v) Presume that there will be risks in revenue recognition based on that evaluate transactions.