Question

1. There are three types of recognised risks from an audit perspective. Identify and explain what these three types of risk are and who has responsibility for each and why. For substantive testing, when considering these risks, what are the factors that impact on an auditor’s decision when considering the type of audit procedures to be performed and how will this impact on testing? 10 marks

Answer 1

Audit risk is the risk that auditor issuing the incorrect audit comment on the financial statement of the company.

These risks can be classified into three different types-

1. Inherent risk- These type of risk could happen due to complexity of client business or transactions. Such complexity requires high level if judgement and these risks cannot be eliminated by company's internal control.These type of risks affected by various external factors. To reduce these risks, the auditor needs to assess the risk and set up proper audit procedures

2. Control risk- Control risk are the risks of material misstatement happens due to weakness in internal control system of company. Primarily the management needs to analyse the effectiveness and efficiency of internal controls in order to avoid the misstatement in financial statements. To reduce this risk, the auditor first needs to analyse the internal controls of the company whether those can be relied or not. The primary responsibilty is of company to reduce these risks.

3. Detection risk- This risk is on oart of auditor rather than on client part. The risk happens due to inability of auditor to detect the misstatement in financial statement. Improper audit planning, not understanding the client business can result into these type of risks.These risks can be minimised by aplying proper audit approach, employing strong audit team, clear understanding of client business and transactions, planning the audit objectives etc. The primary responsibilty of auditor to reduce these risks.