ASSESSMENT OF CONTROL RISK

MODULE 1 (PART 3)

AUDIT RISK
 THE TERM AUDIT RISK REFERS TO THE POSSIBILITY THAT THE AUDITORS FAIL TO APPROPRIATELY
MODIFFY THEIR OPINION ON FINANCIAL STATEMENTS THAT ARE MATERIALLY MISSTATED. IT
CONSISTS OF THE FOLLOWING
 A MATERIAL MISSTATEMENT IS AN ASSERTION ABOUT THE ACCOUNT HAS OCCURRED; AND
(INHERENT RISK, AND CONTROL RISK)
 THE AUDITORS DO NOT DETECT THE MISSTATEMENT (DETECTION RISK)

INHERENT RISK
 THIS REFERS TO THE SUSCEPTIBILITY OF AN ACCOUNT BALANCE TO MATERIAL ERRORS
ASSUMING THE CLIENT DOES NOT HAVE ANY RELATED INTERNAL CONTROLS
 THE MORE COMPLEX THE COMPUTATION IS, THE MORE IT IS PRONE TO ERRORS
 CASH IS MORE LIKELY TO BE STOLEN THAN PLANT ASSETS
 MAJOR FACTORS THAT AUDITORS CONSIDER WHEN ASSESSING INHERENT RISK:
 NATURE OF THE CLIENT’S BUSINESS
 INTEGRITY OF MANAGEMENT
 CLIENT MOTIVATION
 RESULTS OF PREVIOUS AUDIT
 INITIAL VERSUS REPEAT ENGAGEMENT
 RELATED PARTIES
 NONROUTINE TRANSACTIONS
 SUSCEPTABILITY OF DEFALCATION
 JUDGMNET REQUIRED TO CORRECTYRECORD ACCOUNT BALANCES AND TRANSACTIONS
 MAKE UP OF POPULATION

CONTROL RISK
 IS A RISK THAT A MISSTATEMENT, THAT COULD OCCUR IN AN ACCOUNT BALANCE OR CLASS OF
TRANSACTIONS AND THAT COULD BE MATERIAL, INDIVIDUALLY OR WHEN AGGREGATED WITH
MISSTATEMENTS IN OTHER BALANCE OR CLASEES, WILL NOT BE PREVENTED OR DETECTED AND
CORRECTED ON A TIMELY BASES BY THE ACCOUNTING AND INTERNAL CONTROL SYSTEM

PRELIMINARY ASSESSMENT OF CONTROL RISK

 IS THE PROCESS OF EVALUATING THE EFFECTIVENESS OF AN ENTITY’S ACCOUNTING AND
INTERNAL CONTROL SYSTEMS IN PREVENT ING OR DETECTING LAND CORRECTING MATERIAL
MISSTATEMENTS
 CONTROL RISK MAY BE ASSESSED IN QUANTITATIVE TERMS OR IN NONQUANTITATIVE TERMS
THAT RANGE FROM A MAXIMUM TO MINIMUM
 FOR CONSEVATISM, AUDITORS USE THE MAXIMUM LEVEL OF CONTROL RISK
 AUDITORS USE THE CONCEPT OF PREOFESSIONAL SKEPTICISM
 ASSESSING CONTROL RISK AT BELOW MAXIMUM LEVEL INVOLVES:
 IDENTEFYING SPECIFIC INTERNAL CONTROL STRUCTURE POLICIES AND PROCEDURES
RELEVANT TO SPECIFIC ASSESTIONS
 PERFORMING TEST OF CONTROLS TO EVALUATE THE EFFECTIVENESS

MANAGEMENT ASSERTIONS
 REFER TO MANAGEMENT CLAIMS IN RELATION TO THEIR FINANCIAL STATEMENT
PRESENTATIONS
 EXISTENCE
 OCCURANCE
 COMPLETENESS
 RIGHTS AND OBLIGATIONS
 VALUATION
 MEASUREMENT
 PRESENTATION AND DISCLOSURE
TEST OF CONTROLS
 THESE ARE THE PROCEDURES CONDUCTED BY THE AUDITOR TO OBTAIN AUDIT EVIDENCE
ABOUT THE EFFECTIVENESS OF THE :
 DESIGN OF THE ACCOUNTING AND INTERNAL CONTROL SYSTEM
 OPERATION OF THE INTERNAL CONTROLS THROUGHOUT THE PERIOD
 THESE ARE CONCERNED WITH
 HOW THE POLICY WAS APPLIED
 THE CONSISTENCY OF APPLICATION OF INTERNAL CONTROL
 BY WHOM IS WAS APPLIED
 THE LOWER THE ASSESSMENT OF CONTROL RISK, THE MORE SUPPORT THE AUDITOR
SHOULD PRESENT
 TEST IF CINTROLS ORDINARILY INCLUDE PROCEDURES SUCH AS INQUIRIES OF APPROPRIATE
PRESONNEL, INSPECTION OF DOCUMENTS AND REPORTS, AND OBSERVATION OF THE
APPLICATION OF SPECIFIC INTERNAL CONTROL STRUCTURE POLICIES AND PROCEDURES

DETECTION IRSK
 THEIS REFERS TO THE RISK THAT THE AUDITOR'S EXAMINATION WILL NOT DETECT MATERIAL
MISSTATEMENT OR ERROR IN AN ACCOUNT BALANCE.
 INFLUENCED BY THE NATURE, TIMING, AND EXTENT OF THE AUDITOR’S PROCEDURES
(SUBSTANTIVE TESTING)

INHERENT RISK, CONTROL RISK, AND DETECTION RISK

 THE INHERENT RISK AND THE CONTROL RISK ARE THE RISKS THAT THE ASSERTION IS MSSTATED;
WHILE THE DETECTION RIST IT THE RISK THAT THE AUDITOR CANNOT DETECT THAT
MISSTATEMENT
 THE INTERENT RISK AND THE CONTROL RISK EXIST INDEPENDENTLY OF THE AUDIT OF THE
FINANCIAL STATEMENTS
 THE AUDITORS CONTROL DETECTION BY THE AMOUNT OF EVIDENCE THEY ACCUMULATE

AUDIT RISK MODEL

 AUDITORS USE THIS RELATIONSHIP TO DETERMINT THE NATURE, TIMING, AND EXTENT OF
AUDIT PROCEDURES TO MANAGE AND CONTROL AUDIT RISK
 AR= IR x CR x DR