Seatwork: OVERVIEW OF RISK-BASED AUIT PROCESS

1. What are the three phases of the audit process? Give specific activities to be undertaken by the auditor for each
phases.

- The three phases of the audit process are risk assessment, risk response and reporting.
- Risk assessment :
 Performance engagement activities to decide whether to accept or continue audit engagement
 Planning the audit to develop an overall audit strategy and audit plan
- Risk response :
 Designing overall responses and further audit procedures to develop appropriate responses to the
assessed risk of material misstatement
 Implementing responses to assessed risk of material misstatement to reduce audit risk to an
acceptably low level
- Reporting :
 Evaluating the audit evidence obtained to determine what additional audit work is required
 Forming an opinion based on audit findings and preparing the auditor’s report

2. Explain Risk-Based Approach under the context of courting (for gentlemen) or accepting/rejecting the proposal
of the gentlemen (for ladies)

- Accepting/Rejecting the proposal of the gentlemen

3. What is the difference between Risk-Based and Account-Based audit?

- Auditors first obtain an understanding of control and assess control risk for particular type of errors and
frauds in specific accounts and cycle for account-based audit while risk-based audit is that the auditors
obtain an understanding of the client’s objectives.

4. What are the four critical components of risk that are relevant to the conduct of the audit. Explain each.

- The four critical components of risk that are relevant to the conduct of the audit are audit risk, engagement
risk, financial reporting risk and business risk.
- Audit risk : the risk that an auditor may give an unqualified opinion on financial statements
- Engagement risk : the risk that a CPA firm is exposed to because it is associated with a particular client
including loss of reputation
- Financial Reporting Risk : risk that relate directly to the recording of transactions
- Business Risk : risk that affect the operations and potential outcomes of organizational activities

5. State the purpose and nature of the Engagement Letter.

- Purpose : An engagement letter is sent to the client by the auditors to make clear the nature of the
engagement, any limitations on the scope of the audit, work to be performed by the client's staff, and the
basis for computing the auditors' fee.
- Nature : The engagement letter represents the written contract for the engagement, and its primary
objective is to prevent possible misunderstandings between the client and the auditors. It constitutes an
executory contract between the auditors and the client.