1. M ODULE 6 A UDIT R ISK CA. S RIPRIYA K UMAR Practical/ Article Training

2. L EARNING O BJECTIVES What is Audit Risk Components of Audit Risk Model for Audit Risk Illustration 2

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

4. A UDIT RISK

5. Inherent RiskControl RiskDetection Risk A UDIT R ISK

6. Audit Risk = Inherent Risk X Control Risk X Detection Risk 6

7. I NHERENT R ISK 7 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

8. C ONTROL R ISK 8 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

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

10. A UDIT RISK Audit Risk = Inherent Risk X Control Risk X Detection Risk 10

11. A UDIT RISK – “M ATERIAL ” M ISSTATEMENT

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

13. S OME I LLUSTRATIONS OF M ATERIALITY 13 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 Error impacting the decision of user of the Financial Statement:

14. W HAT N EXT ? W HAT DO I D O ? I understand Audit Risk!

15. T HANK Y OU Practical/ Article Training