Question

Provide two examples of items that “Do Not Fit the Auditor’s Expectation” per the risk analysis decision tree. One example should be an acceptable variation and the other an unacceptable variation.

Enter your answer in accordance to the question statement

Answer 1

Auditor risk is the risk that auditor expressed incorrect opinion on the financial statement.

eg. Issuing unqualified report instead of qualifying report.

There are 3 components of Audit Risk

1. 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.

2. Control Risk :

Control risk is the risk that arise because either internal control were not there in the organisation or internal control were not effective and continous.

3. Detection Risk :

Detection risk is the risk that auditor could not detect material misstatement in the financial statement.

An auditor consider only those items  which are material. That mean which are having material impact on the financial statements, either individually or aggregately.

Few examples that do not fit the auditor's expectation as per risk analysis tree while auditing the financial statement.

1. Fraud ( unaccepetable )

2. Embezzlement ( unaccepetable )

3. Unusual Fluctuations ( unaccepetable )

4. Uncertain Events ( unaccepetable )

5. Events occuring after the balance sheet ( unaccepetable )

6. Fraud due to collusion ( unaccepetable )

7. Loss due to fire / earthquake / flood ( accepetable )

8. Error commited in good faith ( accepetable )