MODULE 6 AUDIT RISK CA SRIPRIYA KUMAR Practical

MODULE 6 AUDIT RISK CA. SRIPRIYA KUMAR Practical/ Article Training

LEARNING OBJECTIVES What is Audit Risk Components of Audit Risk Model for Audit Risk Illustration 2

AUDIT RISK – RISK OF INCORRECT OPINION A • Unqualified (clear) opinion where qualification is necessary B • Qualified opinion where such qualification is not necessary C • Omission of Emphasis in audit report D • Providing an opinion although there was a scope limitation 3

AUDIT RISK

AUDIT RISK Inherent Risk Control Risk Detection Risk

AUDIT RISK Audit Risk = Inherent Risk X Control Risk X Detection Risk 6

INHERENT RISK Inherent Risk is the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls. Examples include Involvement in complex financial market transactions Newly formed entity in a complex business 7

CONTROL RISK Control Risk is the risk of a material misstatement in the financial statements arising due absence or failure of controls. Examples include No segregation of duties Key positions manned by unqualified personnel 8

DETECTION RISK The risk that the auditors fail to detect a material misstatement in the financial statements Can be reduced by auditors by increasing their sample size Can never be zero as audit evidence is persuasive rather than conclusive. This is the Residual Risk 9

AUDIT RISK Audit Risk = Inherent Risk X Control Risk X Detection Risk 10

AUDIT RISK – “MATERIAL” MISSTATEMENT

IMPORTANCE OFMATERIALITY – SA 320 Materiality in Planning and Performing an Audit Misstatements, including omissions, are considered to be material if they, expected to individually or in the aggregate, could reasonably be influence the economic decisions of users taken on the basis of the financial statements 12

SOME ILLUSTRATIONS OF MATERIALITY Error impacting the decision of user of the Financial Statement: Errors which account for a significant percentage of the profit/ loss as reported Errors causing a profit to be shown as a loss or vice versa Statutory Compliance violations Vitiation of the going concern assumption 13

WHAT NEXT? WHAT DO I DO? I understand Audit Risk!

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