Question

As an auditor who is using sampling to perform a test of controls, one must be concerned with a component of sampling risk known as the risk of incorrect acceptance. Explain what this risk is and how it relates to A.) control risk, B.) detection risk, C.) substantive procedures performed by the auditor and D.) the auditor’s opinion on financial statement fairness. Be specific.

Answer 1

when an auditor expresses an inappropriate/incorrect opinion on financial statements it is termed as audit risk.

Risk can be of :

a)control risk:it is risk associated with material misstatements in the financial statements arising due to absence of information.it has a high risk.

b)detection risk:when an auditor fails to detect/find a material misstatement in the finacial statements it is termed as detection risk

consedering the nature,timing and extent of further audit procedure the auditor will design a substantive procedure to lower the risk.substantive procedure are performed to detect the material misstatement, test control technequies.It includes:

i)examining/verfying the journal entries and other transactions recorded during the conduct of audit procedure

ii)agreeing the financial statements with accompanying/supportive notes

AUDITORS OPINION ON FINANCIAL STATEMENTS:

The auditors opinion shouls constitute appropriate audit evidences like:

i)management response's

II)experiences from past audits

iii)sources and reliability of information

iv)persuasiveness of audit evidences

v)audit documentation