Please enable JavaScript.

Coggle requires JavaScript to display documents.

Seminar 5 Audit Planning and Risk Assessments Part 1 - Coggle Diagram

- - - - risk of material misstatement may exist at
        
        the overall financial report level for risks that are pervasive to the financial report as a whole and may affect many accounts and many assertions
        
        the assertion level for classes of transactions, balances or disclosures that are assessed to determine the nature, timing and extent of further audit procedures required to obtain sufficient appropriate audit evidence about those specific items.
        
        Inherent risk
        
        The susceptibility of an assertion about a class of transactions, account balance or disclosure to material misstatement given the inherent and environmental characteristics, but without regard to related internal controls. For example, cash is more susceptible to theft than an inventory of cement. Complex calculations are more likely to have errors than simple calculations
        
        Control risk
        
        The risk that a material misstatement in an assertion about a class of transactions, account balance or disclosure may not be prevented or may not be promptly detected and corrected by the entity’s internal control. For example, poor controls over the custody of inventory increase the possibility of theft. For each account balance, the auditor identifies the transaction classes that affect the balance and considers whether there is reasonable assurance that the specific control objectives for those transaction classes have been achieved. There is an inverse relationship between the degree of assurance that control objectives have been achieved and the degree of control risk. An auditor determines a preliminary assessed level of control risk at the planning stage, based on the auditor’s understanding of the internal control. A final actual assessed level of control risk is determined based on the results of tests of controls during interim testing
      - Detection risk
        
        risk that an auditor’s substantive procedures performed to reduce audit risk to an acceptably low level will not detect a material misstatement. In the planning phase of the audit, a planned acceptable level of detection risk is determined for each significant assertion. The planned levels of detection risk are revised, where necessary, if the auditor encounters evidence that alters the original assessments of inherent risk or control risk
        
        can alter the level of detection risk by means of (1) adequate planning (2) proper assignment of personnel to audit engagement team (3) application of professional skepticism (4) appropriate decisions on nature, timing and extent of audit procedures (5) effective performance of audit procedures and evaluation the results (6) supervision and review of audit work performed
        
        inversely related to the effectiveness of auditing procedures and the risk of material misstatement. The greater the risk of material misstatement, the less detection risk that can be accepted and so the more effective auditing procedures must be
        
        Arise due to two reasons, auditor needs to address separately
        
        Sampling risk - The risk that the sample is not representative of the population. This is the risk that the auditor’s conclusion based on the sample used would be different had the entire population been subjected to the same audit procedure. Sampling risk can be reduced by increasing the sample size, but cannot be eliminated unless the entire population is tested.
        
        Non-sampling risk - The risk of arriving at incorrect audit conclusions by failing to apply appropriate or effective audit procedures, by applying the procedures improperly or by drawing incorrect conclusions from the results. This risk exists even if the auditor applies the audit procedures to the entire population. Non-sampling risk can be controlled through the use of quality control procedures and by adhering to the auditing standards.
        
        Exhibit 4.2