Question

Nicole Henderson is a third-year accounting student and she provides the following comments on risks. Indicate whether you agree or disagree with them respectively.

1. Audit risk can be applied quantitatively or qualitatively. In essence, it is a concept used to ensure that the auditor gathers sufficient evidence to render an opinion on the financial report with little likelihood of being wrong.
2. Control risk refers to both the design of controls and the operation of controls. To assess control risk as low, the auditor must gather evidence on both the design and operation of controls.
3. Audit risk should vary inversely with engagement risk: The higher the risk with being associated with the client, the lower should be the audit risk taken.
4. In analyzing the audit risk model, it is important to understand that much of it is judgmental. For example, setting audit risk is judgmental, assessing inherent and control risk is judgmental and setting detection risk is simply a matter of the individual risk preferences of the auditor.

Answer 1

Ans: Yes I agree with the statements above.All the statements are correct above.

To understand it you shall know about the types of Audit risk and its types.

Audit Risk means basically that an auditor may issue an unqualified report due to the auditor's failure to detect material misstatement either due to error or fraud.

As an example , suppose you are the auditor of a company and issued an unqualified opinion to the audited financial statements even though the financial statements are materially misstated. Material misstatements of financial statements fail to identify or detect by auditors. Audit risk can happen because of neglegence of cliet or auditor both, on the basis of this risk's are identified into three types

• Inherent risks

Inherent risk means which are not possible to detect or protected by the organizations internal control system.This risk could happen as a result of the complexity of the client’s nature of business or transactions.examples like non recording of transactions by an employee

• Control Risks

Control risk means current internal control could not detect or fail to protect significant error or misstatement in the financial statements.Basically if the control system of a company is weak then there is a high chance of material misstate and for that there is a high chance the auditor could not detect that misstatements and subject to audit risk.

• Detection Risks

Detection risk means if a auditor fails to detect the material misstatements in the financial statements and issue a opinion on the basis of that incorrect statement that is called as detection risk. this happens because of inappropiate auditing, poor management, poor audit planning.

That's why before Auditing of a entity the auditor should perform risk assessment that all the possible misstatements are could be happen whie audtiong are sorted/identified.

Audir Risk= (Inherent Risk+Contro Risk+Detection Risk)