Question

In: Accounting

1- What is Audit risk? (Write one or two paragraphs, max 200 words in your own...

1- What is Audit risk? (Write one or two paragraphs, max 200 words in your own words and with supporting references)

Solutions

Expert Solution

Answer :-

Audit Risk:--- An Auditor's judgment as to what is sufficient and appropriate audit evidence is affected by the degree of risk of mis-statement. Audit risk is the risk that an auditor may give an inappropriate opinion on financial information which is materially Misstated. For example, an auditor may give an unqualified opinion on financial statements without knowing that they are materially Misstated. Such risk may exist at overall level, while verifying various transactions and balance sheet items.

It is a function of the risks ofor material Misstatements and detection Risk. The inherent and control risk assessment areally functions of the entity's business and its environment and the nature of the account balances or classesof transactions, regardless of whether an audit is conducted. Even though inherent and control risks cannot be controlled by the auditor, the auditor can assess them and design his substantive procedures to produce an acceptable level of detection Risk, thereby reducing audit risk to an acceptably low level.

For a given level of audit risk, the acceptable level of detection Risk bears and inverse relationship to the assessed risks of material Misstatement at the assertion level.

Foe example, the greater the risks of material Misstatement the auditor believes exists, the less the detection Risk that can be accepted and accordingly, the more persuasive the audit evidenceffectiveness required by the auditor.

There are three types of audit risk they are:-

1. Inherent risk

2. Control Risk

3. Detection Risk


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