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8 views16 pages

PPT_6[1]

Uploaded by

jcj220017857
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Advanced

Auditing
Audit risk

 One of the main requirements of the auditor is to ‘obtain sufficient


appropriate evidence to reduce audit risk to an acceptably low
level’.
 Audit risk is the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated.
Audit risk comprises the risk of material misstatement and
detection risk.
Motive of an Auditor
'The objective of the auditor is to identify and assess the risk of
material misstatement, whether due to fraud or error,
 at the financial statement and assertion levels,
 through understanding the entity and its environment,
 including the entity's internal control,
 thereby providing a basis for designing and implementing
responses to the assessed risks of material misstatement.'
What is a misstatement?

'A difference between the reported amount, classification,


presentation, or disclosure of a financial statement item and the
amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable
financial reporting framework. Misstatements can arise from
error or fraud.'
In conducting a thorough assessment of risk, auditors will be able to:
 Identify areas of the financial statements where misstatements are
likely to occur early in the audit.
 Plan procedures that address the significant risk areas identified.
 Carry out an efficient, focused and effective audit.
 Reduce the risk of issuing an inappropriate audit opinion to an
acceptable level.
 Minimize the risk of reputational and punitive damage.
Categories of misstatement

Factual
Misstatements

Projected Judgemental
Misstatements Misstatements
i. Factual misstatements: a misstatement about which there is
no doubt.
ii. Judgmental misstatements: a difference in an accounting
estimate that the auditor considers unreasonable, or the selection
or application of accounting policies that the auditor considers
inappropriate.
iii. Projected misstatements: a projected misstatement is the
auditor’s best estimate of the total misstatement in a population
through the projection of misstatements identified in a sample.
Inherent risk

 Inherent risk is the susceptibility of an assertion about a class of


transaction, account balance or disclosure to misstatement that could be
material, before consideration of any related controls.
 Complex accounting treatment is an example of an inherent risk. For
example, where an accounting standard provides guidance on a specific
accounting treatment, this might not be understood by the client
resulting in material misstatement.
 Inherent risk may arise due to the nature of the
industry, entity or the nature of the balance itself.
 For example, inventory is inherently risky if it quickly
becomes obsolete, as it may not be valued
appropriately at the lower of cost and net realizable
value (NRV) as required by IAS 2 Inventories.
Control risk

 Control risk is the risk that a misstatement that could occur and that
could be material, will not be prevented, or detected and corrected
on a timely basis by the entity's internal controls.
 Control risk may be high either because the design of the internal
control system is insufficient in the circumstances of the business or
because the controls have not been applied effectively during the
period.
 EXAMPLE- risk of fraud, poor system designs, cybersecurity
Detection risk
 Detection risk is the risk that the procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement that
exists and that could be material.
 Detection risk comprises sampling risk and non-sampling risk:
 Sampling risk is the risk that the auditor's conclusion based on a sample is different
from the conclusion that would be reached if the whole population was tested, i.e.
the sample was not representative of the population from which it was chosen.
 Non-sampling risk is the risk that the auditor's conclusion is inappropriate for any
other reason, e.g. the application of inappropriate procedures or the failure to
recognize a misstatement.
 The auditor must amend the audit approach in response to risk assessment to
ensure they detect the material misstatements in the financial statements.

They can achieve this by:
 Emphasizing the need for professional scepticism.
 Assigning more experienced staff to complex or risky areas of the engagement.
 Providing more supervision.
 Incorporating additional elements of unpredictability in the selection of further audit
procedures.
 Making changes to the nature, timing or extent of audit procedures, e.g.
 Placing less reliance on the results of systems and controls testing.
 Performing more substantive procedures.
 Consulting external experts on technically complex or contentious
matters.
 Changing the timing and frequency of review procedures.
Professional scepticism
 Professional scepticism is: 'An attitude that includes a
questioning mind, being alert to conditions which may indicate
possible misstatement due to fraud or error, and a critical
assessment of audit evidence.’
 This requires the audit team to have a good knowledge of how
the client’s activities are likely to affect its financial statements.
The audit team should discuss these matters in a planning
meeting before deciding on the detailed approach and audit
work to be used.
Thank You

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