Slide4.11 Learning Objectives Illustrate risk model Determine level of OAA Identify risks Calculate detection risk.

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Presentation transcript:

Slide4.11 Learning Objectives Illustrate risk model Determine level of OAA Identify risks Calculate detection risk

Slide4.12 Session Overview Purpose of identifying and assessing risk Components Factors influencing risk Risk model How to assess risk

Slide4.13 Inherent Risk Inherent risk is defined as the risk that in the absence of preventive internal accounting controls, a material error will occur in the accounting process.

Slide4.14 Inherent Risk (short definition) The risk of material error occurring in the first place

Slide4.15 Control Risk Control risk is the risk that error that has occurred in the component and that could be material, when aggregated with errors in other components, will not be detected on a timely basis by the internal controls in place.

Slide4.16 Detection Risk Detection risk is the risk that the auditor’s procedures will not detect error that exists in the component and that could be material when aggregated with error in other components.

Slide4.17 Overall Audit Risk Overall audit risk is the maximum risk that the auditor is prepared to assume that error in the financial statements aggregating to more than materiality will remain undetected at the end of the audit.

Slide4.18 The Audit Risk Model OAR= IR x CR x DR where: OAR= Overall Audit Risk IR= Inherent Risk CR = Internal Control Risk DR = Detection Risk

Slide4.19 THE RELATIONSHIP BETWEEN IR,CR,DR AND AR OAR = IR x CR x DR DR = OAR DR = OAR X CR x IR CR x IR OAR = 1- ASSURANCE LEVEL RESIDUAL RISK DST SBA Assurance DST - Detailed Substantive Testing SBA - Systems Based Assurance (I.e. CR + IR)

Slide4.110 Substantive Work Level Matrix Assessment of control risk Assessment of inherent risk

Slide4.111 Risk Model Steps

Slide Starting point is to set the level of overall audit risk; 2.Assess the component risks starting with inherent risk then control risk; 3.Rearrange model and solve DR

Slide4.113 Assurance Guideline 95 % : Most common level 97 % : Few sensitive entities 99 % : Extremely sensitive cases

Slide4.114 Factors to Consider When Assessing Inherent Risk Number of adjustments Significance of adjustments Complexity Susceptibility to misappropriation Quality of accounting personnel Judgment involved Mix of population Management intentions Inherent Risk

Slide4.115 Factors to Consider When Assessing Control Risk Control Risk Control system working effectively Operatedadequately Independent of processing procedures Require collusion to by-pass Recorded in documentaryevidence Control objective is met Carried out on time Carried out by staff of appropriate seniority