Question

• Audit documentation- what it covers
• Importance of audit documentation
• Describe the audit risk model and its components

Answer 1

Audit Documentation

Audit Documentation is a record of documents collected by the auditor during an Audit. It is the basis on which the Auditor draws the Audit Conclusions and issues the Audit Report. The Audit documents are also referred to as Working Papers.

Audit Documentation will include:

1. Checklist of Areas covered, Audit Plan
2. Procedures undertaken to perform Audit
3. Supportings, evidences discovered during the Audit process to support Audit conclusions
4. Conclusions reached upon by the Auditor based on evidences.

Importance of Audit Documentation

1. Audit document is a supporting for Auditor to establish that the Audit was carried out in accordance with generally accepted accounting principals
2. It is an evidence for supporting the conclusions formed and expressed by the auditor in the Auditor's Report.
3. Help the audit to plan and prepare for the Audit
4. Can be used as a evidence in Court of Law
5. Helpful to the Auditors who are newly engaged for reviewing previous year's documentation
6. Enables to review the work of the Auditors and helps establish accountability of the auditors
7. Helpful in Quality Review Audits

Audit Risk Model

Audit Risk Model determines the risk in Audit. It also describes how the risks can be managed.

Audit Risk Model depends on the following components:

1. Control Risk : Control risk arises due to risk of exisitng control failures or due to no controls being present to mitigate risk. This may lead to incorrect financial statements.
2. Detection Risk : Detection risk is the risk that the auditor may not be able to detect a material misstatement in the financial statement leading to incorrect opinion in the Auditor's Report.
3. Inherent Risk : Inherent Risk is a risk which may be due to an error or omission caused other that failure of controls. This risk exists where transactions are complex in nature, a great deal of judgement is required for recording the transactions.

The formula for Audit Risk is:

Audit Risk : Control Risk * Detection Risk * Inherent Risk

The auditor has to assess the levels of each of the above risks to determine the extent of auditing procedures to be carried out to form an opinion for the Auditor's Report. Higher the risk, bigger would be the Audit sample, in order to mitigate th risk and bring it to the acceptable risk levels.