Question

1. Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially stated. Why is the concept of audit risk so important to auditors and what can they do to reduce it to an acceptably low level?

2. Gaining an understanding of a client includes auditors learning how their clients measure their performance. How is this information used by auditors in audit planning and what are examples of non-financial performance measures commonly used by auditors?

3. Analytical procedures are used by auditors to evaluate their clients' financial information by studying plausible relationships among both financial and non-financial data. Explain how analytical procedures are used at the different stages of an audit

Answer 1

Answer to question 1

Audit means conducting a complete independent inspection of the books of accounts. audit is conducted by a Chartered Accountant. It is the duty of an auditor to give a true and fair view on the affairs of the company being audited by him

Audit risk is the risk that exists in the conduct of an audit , it cannot be neglected , it is a part of audit

Things that can be done to avoid and reduce it:

For the purpose of successful conduct of audit India Institute of Chartered Accountants of India have issued various Auditing Standards.

Applying this standards while conducting audit is the duty of an auditor

Audit planning should be made very efficiently so as to reduce the audit risk

Auditor should have proper knowledge of the business and its environment so as to calculate normal risk and acceptable risk according to the materiality of the industry

Answer to question 2.

An auditor can gain a lot of knowledge after reading the previous audit reports of the company , the MOA , and AOA of the company , analyisis of past balance sheets , financial reports, understanding the envirnoment in which the company exists

All this shall help the auditor in understanding the entity and providing a true and correct report on the financials of the company

examples of non-financial performance measures commonly used by auditors are

1. Sales Turnover Ratio

2. Labour Turnover Ratio

3. Debtors Turnover Ratio

4. Average time to hire new employee

5.Employee Promotion Ratio

6. Employee Productivity Ratio

Answer to question 3

Standard on Auditing 520 gives us a detailed meaning of what audit analytical procedures are and how are they used

Analysis of financial and non financial data is the motive of conducting anaytical procedures

Analytical procedures are used to reduce the audit risk and understand the reliability of the data provided by the client and also to understand the credibility of the data as well

It is the audit risk mixed with analytical procdures which helps the auditor to give correct and true view on the financial statements of the entity