Audit risk
From Wikicpa
Audit risk is a term that is commonly applied in relation to the audit of the financial statements of an entity. The primary objective of such an audit is to provide an opinion as to whether or not the financial statements present fairly the financial position and results of the entity. Audit risk is the risk of the auditor providing an inappropriate opinion on the financial statements. In other words, it is the risk of the auditor stating the financial statements present fairly the financial position of the entity, when in fact they do not.
A technical explanation of this term can be found in International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (http://www.ifac.org).
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Components of Audit Risk
Inherent Risk
Inherent risk is the auditor's assessment that there are material misstatements in the financial statements before considering the effectiveness of internal controls. If the auditor concludes that there is a high likelihood of misstamtement, ignoring internal controls, the auditor would conclude that the inherent risk is high. Internal controls are ignored in setting inherent risk because they are considered separetly in the audit risk model as control risk. It is often an area of professional judgement on the part of an auditor. Examples of accounts with low inherent risk are fixed assets, easy to observe, or securities traded in the stock market whose market price is easily observable.
Control Risk
Control risk is a measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable level will not be prevented or detected by the client's internal control system. This assessment includes an assessment of whether a client's internal controls are effective for preventing or detecting misstatements and the auditor's intention to make that assesment at a level below the maximum (100 pecent) as part of the audit plan.
Acceptable Audit Risk
Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified (or clean) opinion was issued. If the auditor decides to lower audit risk, that means that the auditor wants to be more certain that the financial statements are not materially mistated
The product of inherent risk and control risk is referred to as the Risk of Material Mistatement. It is allowable to make a combined assessment of inherent and control risk, called Risk of Material Mistatement.
References
- Srivastava R.P. & Shafer G.R. (1992) " Belief function Formula for audit risk " Review : Accounting Review, Vol. 67 n° 2, pp. 249-283, for evidence theory applied on audit risk.
- Lesage (1999)" Evaluation du risque d'audit : proposition d'un modele linguistique " Review : Comptabilite, Controle, Audit, Tome 5, Vol. 2, September 1999, pp.107-126, for fuzzy audit risk.
- Fendri-Kharrat et al. (2005)"Logique floue appliquee a l'inference du risque inherent en audit financier ", Review : RNTI : Revue des Nouvelles Technologies de l'Information, n° RNTI-E-5, (extraction des connaissances : etats et perspectives), November 2005, pp.37-49, Cepadues editions, for fuzzy inherent audit risk.
