Audit risks and components
AICPA's Standard No. 47 Audit Risk Audit Risk The risk of the auditor failing to properly adjust his or her opinion regarding financial statements with material misstatement.
One author, Janet Colbert, also identified the risk of an unexpected review of the financial statements.
If the potential audit risk of a financial statement that contains a material error can be identified.
Audit risk is an important factor to consider when planning the audit process or when determining audit procedures or when evaluating evidence and evidence of audit. The Institute of Chartered Accountants emphasizes the risk assessment in Benchmark No. 47 by saying: You must check your quantity or quantity.
You meet your auditing standards in the United States. In financial statements or which are in themselves transactions, and
The risk of a final audit or that causes the risk of the auditor's review Review of accepted audit risk is a measure of how the auditor is prepared This is why the person being prosecuted. The auditor determines the risk at the lowest acceptable level. Does the auditor mean that the financial statements are not materially misstated? Full assurance of certainty, no doubt in case of full (zero risk) for the accuracy and validity of the financial statements which means that you have an account in financial statements completely free of errors and fundamental distortions.
It is worth noting that it is often repeated references? Audit assertions or any synonyms are complementary (complementary) to audit risk. Will confirm the accepted risk of 98%.
If the auditor is not at risk at the level of the balance or its equivalent. Which means that the risk of audit
1. Risks related to the nature of the particular element
The underlying love.
2. Risks related to the effectiveness of internal control.
Risk Disclosure Risk
Why explain the following three risks:
2.1 Accidental risks.
And your associated risk compensation "Transaction calculation of the equation or type of transaction error What can happen in your country (distortions) of the acceptable amount are found in a cycle or part of the transactions before taking into account the effectiveness of internal control, The financial statements' most recent vulnerability is based on the assumption that there is no internal control, where internal control is disregarded in determining the inherent risks.
The inherent risks depend on several factors that can be summed up in the following factors:
First: The nature of the particular balance or type of transaction: The inherent risks are greater when the particular balance or type of transaction is more prone to intentional or unintentional error. For example, the risks associated with the monetary component are much greater than those relating to long-term assets, Conversely, risk is lower if the calculations include actual data as to whether they are based on estimates of future transactions, there is no doubt that the risk is less for the expense of wages than for doubtful debts.
Second: External factors such as technological developments: If the audited entity operates in an industry characterized by rapid technological developments, there is an inherent risk to the stock of goods or the stock in such industries is more likely to be overestimated. The same is often done for accounts that are subject to change in consumer demand .
Third: Other factors related to the financial position of the establishment: such as insufficient working capital available to continue operations.
One study has shown that inherent risks are estimated separately from control risks. And that there are many factors that generally affect the inherent risks such as:
Seasonal activity.
The size of the facility under review.
The degree to which accounts are exposed to fraud and theft and the chances of their occurrence.
The nature of the entity's operations and the nature of the potential errors.
The industry to which the customer belongs.
The financial position of the client and the operational and regulatory pressures to which it is exposed.
Turnover rate of management and board of directors.
The date the errors were modified for a given account.
Use estimates in accounting numbers.
Changes in procedures and regulations.
How difficult it is to identify quantities and values in accounting records.
The inherent risk is one of the most important risks to be accurately assessed as it has a significant impact on the efficiency and effectiveness of the audit process. The efficiency of the audit process is affected if it is identified too high and requires more effort than the auditor and vice versa. The audit process is also significantly ineffective if the inherent risk is not identified at its appropriate level
2/2 Control Risk:
Regulatory risk is defined as "the risk of an error in a credit or in a particular type of transaction that may be material if it is met with an error in other balances or other type of transaction and can not be prevented or detected in a timely manner through internal control procedures" In the sense that regulatory risk is a measure of the probability auditor's estimates that errors (deviations) in excess of the acceptable amount in a cycle or part of transactions will not be prevented or detected by the internal control of the customer.
This risk is a function of the effectiveness of internal control procedures, since the more effective the internal control, the greater the likelihood that there will be no errors or detection by this structure or the risk factor that can be identified for regulatory risks is lower. Given the limits of any internal control system, this risk is inevitable.
The auditor's assessment of this type of risk depends on his or her compliance testing and compliance testing of the entity's internal control. If such an assessment is not proved, the auditor should assume that the regulatory risk is high.
Regulatory risks share the inherent risks that both depend not on the auditor but on the entity under review.
The auditor usually assesses the regulatory risks in the light of the examination and evaluation of the internal control procedures in respect of the account or the specific type of transaction. The auditor then decides whether or not to rely on these procedures, taking into account the degree of risk involved or not relying on them, and extending the analytical and detailed review procedures that require additional audit costs.
The continued development of the design and evaluation of internal control systems has led to the auditor's ability to assess the risks associated with them and to increase their reliability in determining and limiting the required audit procedures. The recent shift has led to the use of statistical and mathematical models to solve the problems of the evaluation and design of internal control systems based on the probability approach in the calendar, considering that the probability approach in its methods is closest to the nature of internal control. In general, the use of such statistical and mathematical models enables the auditor to draw closer to the reality of internal control risks.
The evaluation of the internal control system requires knowledge of the procedures and objective methods and ensuring that such methods and procedures are used as planned. Which requires the auditor to conduct proficiency tests and compliance tests. The auditor's estimate in this case is a function of both the strength of the internal control system evaluation and the strength of the compliance test and the test result.
Hence, auditor's assessment of supervisory risks depends not only on internal control, but also on the strength of compliance tests and on the outcome of such tests. If the results are positive, the auditor's assessment of regulatory risks decreases, and if they are weak, the auditor's assessment of regulatory risks will increase.
In general, identifying references to internal control risks and weaknesses in the internal control system depends to a large extent on the auditor's personal judgment. The weakness of internal control that leads to a high assessment of audit risk is defined as the absence or ineffectiveness of control procedures that result in error or irregularity in the The relative importance of this risk is determined by its effect on the financial statements. It follows that the auditor should determine the probability of an error or irregularity that is not detected in a timely manner and materially affects the financial statement items
Detection Risk:
The risk of discovery relates to the effectiveness of the audit procedure in the discovery of errors, where the risk of discovery is defined as "the risk that audit procedures may lead the auditor to the conclusion that there is no error in a stock or in a particular type of transaction at the time that such error exists And shall be material if met with errors in other balances or other type of transaction 'AICPA'
The risk of discovery is a function of audit procedures and its application by auditor. This risk is partly caused by the uncertainty that prevails when the auditor does not perform a comprehensive examination of the processes. Such a risk may exist even if the auditor performs a comprehensive examination. From the use of references to inappropriate procedures, improper application of procedures or misinterpretation of audit results. Noting that other uncertainties can be reduced to a level that can be tolerated through adequate planning and supervision and carrying out the audit in accordance with appropriate quality control standards. The risk of discovery includes two elements: AICPA:
First: Risks related to the failure of analytical review procedures in detecting errors that are not prevented or detected by internal control procedures. It is called "analytical review risk".
Second: Risks related to the incorrect acceptance of the results of the detailed tests at the time there is a fundamental error that must be rejected and not discovered through internal control procedures, analytical review procedures and other appropriate tests called "detailed audit risk".
The risk of discovery differs from both the inherent risks and the regulatory risks in that they depend on the audit procedures used by the auditor and thus can be influenced by them. In general, there is an inverse relationship between the risk of discovery and both inherent risks and regulatory risks. The lower the degree of inherent risk and the regulatory risks that the auditor believes to exist, the greater the risk of disclosure to the auditor. Conversely, the higher the degree of inherent risk and control risk, Borne by the auditor.
2.4 Other types of audit risk:
In another division of audit risk types, Warren divides the final risk of the review into two types of risks: Janet Colbert:
The first is the possibility of a material error in the financial statements. This risk arises from the direct judgment of the auditor, which means the possibility of obtaining full assurance that the financial statements are free of errors. There are three main determinants of this type:
A - integrity of the management of the establishment.
(B) The strength of the entity's internal control system;
The economic condition of the audited entity.
Second: the probability of failure to detect a fundamental error; this type falls within the scope of direct control of the references, and there are two main determinants of this type of risk:
A. Sampling Risk.
(B) Non-sampling risk.
The risk of sampling is that the auditor may fail to detect a material error because the audit is performed only for part of the community under review and thus the probability of failure to detect errors remains as long as the community is not 100% checked. The risk of non-sampling is the auditor's failure to detect a material error Because of problems resulting from the interpretation or compilation of test results.
Colbert believes that the first type of final risk of review at Warren is to some extent a reflection of inherent risks and regulatory risks, while the second type expresses the risk of discovery
Two authors have classified the final risk components of the review into two types: Robert Elliot and John Rogers
Alpha Risk represents the risk of rejection of the financial statements and does not include a material error.
Beta Risk represents the risk of accepting the financial statements and includes a material error.
The first error is an inefficient error, resulting in the incorrect rejection, consequential re-examination and further examination. This extra effort will result in the auditor having the correct results but at a greater cost than the audit efficiency.
The second type error is called error of effectiveness where incorrect acceptance results in the effectiveness of the audit process.
The second type error is more serious in the review than the first type error, as the second type is related to the effectiveness and purpose of the review.
Change the risk of the accepted audit on business risk Business Risk:
A business risk defines the likelihood that the auditor or audit office may suffer losses as a result of performing a particular audit process, 'AICPA', even if the audit report addressed to the customer is correct. For example, if the customer has declared bankruptcy after the review process has ended. Thus, the likelihood of cases against the audit facility is high even if the quality of the review is good. The loss of business may be due to the costs of litigation, damage to professional reputation, or regulatory action by regulators (such as the USCPA, the Stock Exchange Supervisory Authority or the Saudi Organization for Certified Public Accountants).
AICPA has defined audit risk as the risk that auditors may fail to properly adjust their opinion regarding financial statements with material errors.
One author, Janet Colbert, also knows the risk of an audit as a possible misstatement of the audited financial statements due to the auditor's failure to detect material errors that may be found in those lists that he or she views.
Audit risk can also be defined as the risk that an auditor will express an unqualified opinion on financial statements that contain material misstatement.
Audit risk is an important factor to be taken into account by the auditor, whether in the planning of the audit process or when determining audit procedures or when evaluating the evidence and evidence of evidence in the audit. The Institute of Chartered Accountants of America stressed the need to assess the risk when planning a review in its Standard No. 47 by saying: The auditor should plan the audit so that the audit risk is minimal and appropriate for a proper opinion in the financial statements. Quantity or Quantity.
The auditing standards generally recognized in the United States require the auditor to express an opinion on the financial statements as a single entity. However, if the risk level is determined, it does so at the level of each component of the financial statements. This means that the risk level for each account balance In the financial statements or in respect of each type of transaction, in order to determine the audit procedures necessary to verify each balance or each type of transaction, and in a manner that enables it to express an opinion in the financial statements as a unit of a low level of risk.
The risk of a final review, or sometimes called Acceptable Audit Risk, is a measurement of how the auditor is prepared to accept the possibility that the financial statements will have a material misstatement following the conclusion of the audit and access to an unqualified opinion. It is a personal identification of the risk that the auditor is willing to accept that the financial statements lack fair representation after the review is completed and an unqualified opinion is issued. When the auditor determines the risk of an audit at the lowest acceptable level of risk, the auditor wishes to be more certain that the financial statements are not materially misstated. As a result, full certainty occurs when the risk is zero, whereas when the risk is 100% this is the case of complete uncertainty. The complete assurance of the accuracy and validity of the financial statements is, in practice, Which means that the auditor can not give assurance that the financial statements are completely free of material misstatement.
It should be noted that reviewers often refer to terms such as audit assertions, total assurance, assurance levels, rather than acceptable audit risks. Audit assertions or any synonyms are complementary (complementary) to audit risk. For example, an acceptable review risk of 2% is the same as the accepted audit assertions 98%.
Because the auditor identifies the risk at the level of the individual balance or the specific type of transaction, the ultimate risk of the review depends on the nature of the particular balance or the specific type of transactions and related internal control procedures, and on the effectiveness of the analytical and detailed review procedures, Which means that audit risk consists of three elements:
1. Risks related to the nature of the particular element
Called inherent risk.
2. Risks related to the effectiveness of internal control, which is called control risk.
3. Risks related to the effectiveness of the analytical and detailed audit procedures in the discovery of errors, which is called detection risk
These three risks are explained below:
2.1 Inherent Risk.
The inherent risk is defined as the "specificity of the account balance or the specific type of transactions for an error that is material if it is met with errors in other balances or other types of transactions, with no internal control procedures related to it" and "inherent risks" Which may occur in an accounting item or in a particular type of transaction provided that it is material and not due to the weakness of the internal control system, which means that inherent risks are related to the nature of the component or account in question. (Exclusions) g Idh for an acceptable amount found in the course or part of the transactions before taking the effectiveness of internal controls in mind, or in other words the ability of financial statements of the fundamental error, assuming the absence of internal control, where internal controls are ignored in determining the inherent risks.
risk
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