Audit Risk 2010

Topic: - Audit Risk

Presented to: -
Imran Shahzad
Presented By: -
Fahhad Rasheed (l3f08mcom5312)
M. Khalid Aslam (l3f08mcom5307)

Section: -
M-5 (j)

Table of Contents
1.

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 Audit Risk 2010

What is Risk: -.........................................................................................................................3

2. What is Audit: -....................................................................................................................3

3 .What is Audit risk: -...........................................................................................................3

4. Audit Risk Model................................................................................................................4

a) Inherent Risk: -................................................................................................................4

 Inherent Risk Components.............................................................................................4

b) Control Risk: -...................................................................................................................4

 Control Risk Components...............................................................................................4

c) Detection Risk: -..............................................................................................................5

 Detection Risk Components...........................................................................................5

5. Multiple choice Questions............................................................................................5

What is Risk: -
 The probable deviation in our expected returns is known as risk

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 Risk concerns the expected value of one or more results of one or more future
events. Technically, the value of those results may be positive or negative

What is Audit: -
 An examination and verification of a company's financial and accounting records
and supporting documents by a professional

 Audit is concerned with the verification of accounting data, with determining the
accuracy and reliability accounting statement and reports.

What is Audit risk: -

 The risk that the auditor gives an inappropriate audit opinion when the financial
report is materially misstated

 Audit risk is the risk of the auditor providing an inappropriate opinion on the
financial statements, particularly when those financial statements contain a
material misstatement. Of less concern is the situation where the auditor states
that the financial statements do not meet the standard of fair presentation, when
in fact they do.

Audit Risk Model

There are three types of audit risk in audit risk model which can create the unqualified
audit report and those three are

1. Inherent Risk
2. Control Risk
3. Detection Risk

Inherent Risk: -
 The first filter of the audit risk is inherent risk which is due to the management,
accountant, due to the company, industry, or auditor past experience with the
company
 The risk of material misstatements absent any internal controls or testing

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Inherent Risk Components

 Higher in complex transactions
 Higher where items are more naturally prone to fraud
 Based in part on prior experience
 Industry and management pressures

Note:

Inherent risk cannot be changed by the auditor – it just is

Control Risk: -
 The risk that internal controls will fail to prevent or detect material misstatement
 The tendency of the internal control system to lose effectiveness over time and to
expose, or fail to prevent /detect weaknesses in the systems of control

Control Risk Components

 Depends on the design and execution of controls
 Audit Risk = risk that internal controls will FAIL to prevent or detect misstatement
 High CR means high risk controls will fail
 Low CR means low risk controls will fail
 If CR is high, auditor will not rely much on controls
 If CR is low, auditor can rely on ICS and reduce other types of testing

Detection Risk: -
 The risk that audit tests will fail to detect material misstatement
 The probability that an incorrect audit conclusion will be drawn from the results of
the examination or that the audit work will fail to detect any serious errors.

Detection Risk Components

 A function of the types of tests the auditor does

 Remember nature, timing, and extent

Note:

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This risk is due to the Auditor so this is the only risk element that can be
controlled by the auditor

Multiple choice Questions

Question # 1:
The probable deviation in expected results is called?

a. Inherent Risk
b. Control Risk
c. Risk

Question # 2:
Risk that auditor gives an inappropriate audit opinion when the financial
report is materially misstated?

a. Audit Risk
b. Control Risk
c. Risk

Question # 3:
How many types of risk in audit risk model?

a. 2
b. 3
c. 4

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Question # 4:
The risk that internal controls will fail to prevent or detect material
misstatement is called?

a. Inherent Risk
b. Control Risk
c. Detection Risk

Question # 5:
The risk associated with the auditor and on which audit report is
depending is called?

a. Inherent Risk
b. Control Risk
c. Detection Risk

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