AUDIT RISK

NOVEMBER 2011

individually or when aggregated with other misstatements, before

consideration of any related controls.’

Control risk is ‘the risk that a misstatement that could occur in an assertion

about a class of transaction, account balance or disclosure and that could be

material, either individually or when aggregated with other misstatements, will

not be prevented, or detected and corrected, on a timely basis by the entity’s

internal control.’

Detection risk is defined as ‘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, either individually or when

aggregated with other misstatements.’

Audit risk questions require candidates to identify risks of material

misstatements, which include inherent and control risks as well as detection

risks.

Audit risk model

In all three sessions a number of candidates have wasted valuable time by

describing the audit risk model along with definitions of audit risk, inherent

risk, control and detection risk. Unless the question requirement specifically

asks for the ‘components of audit risk’ or ‘a(chǎn) description of the audit risk

model’, candidates should not provide definitions of audit risk, inherent risk,

control risk or detection risk as no marks are available.

Audit risk versus business risk

The main area where candidates continue to lose marks is that they do not

actually understand what audit risk relates to. Hence, they frequently provide

answers that consider the risks the business would face or ‘business risks’,

which are outside the scope of the syllabus. There are no marks available for

business risks.

Business risks are defined as ‘a(chǎn) risk resulting from significant conditions,

events, circumstances, actions or inactions that could adversely affect an

entity’s ability to achieve its objectives and execute its strategies, or from the

setting of inappropriate objectives and strategies’.

Risks must be related to the risk arising in the audit of the financial statements

and should include the financial statement assertion impacted. Therefore,

audit risks should be related back to relevant assertions.

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