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DefinitionsAudit risk and assuranceIt is not normally practical or cost-effective for auditors to collect evidence in order to have absolute (100%) assurance or confidence of detecting all material deviations. Instead, auditors try to ensure that their conclusions and opinions are based on reasonable assurance, which is obtained from the audit work. Audit risk is the inverse of audit assurance. It is the risk that the auditor is willing to tolerate coming to a wrong conclusion. In practice, audit risk is unavoidable. PrinciplesComponents of audit riskThe components of audit risk are:
Assessment of risks is a judgement rather than a precise measurement. The level attributed to each component is estimated by the auditor on the basis of his/her professional judgement, informed by the procedures outlined below. Audit risk modelThe audit risk model, as shown below, helps auditors to determine how comprehensive the audit work must be so as to attain the desired assurance for their conclusions. [label stroke="true"]Audit risk (AR)= Inherent risk (IR) x Control risk (CR) x Detection risk (DR)[/label] When to consider audit riskAudit risk should be considered when:
InstructionsProcedures to identify and assess riskThe risk-assessment procedures are employed in order to gain an understanding of the following:
The nature and extent of planned audit tests will vary, depending on the auditor's assessment of both inherent and control risk (see Assurance model). The auditor should perform risk assessment procedures as early in the audit as possible, based on various sources of information.
The entity’s own risk-assessmentThe entity's own risk-assessment process can be a source of information. The following important information should be considered as part of the risk assessment for compliance audits:
At the Commission, the DGs establish their own accounting risk analysis per process and per audit assertion. This represents a substantial input to the risk-assessment process for financial audits. However, the auditor should exercise [a-glossary term="professional%20scepticism"]professional scepticism[/a-glossary] , as risks identified by the auditee may not address those that are of importance for audit purposes, and such information may be biased. The ECA's previous work, and the knowledge and experience of the audit chambers should always be considered for both, financial and compliance audits. Where the auditor intends to use such information he or she should determine whether changes have occurred since the previous audit that may affect its relevance to the current audit. This is because changes in the control environment, for example, may affect the relevance of information obtained in the prior year. [/toc-this]Which of the following audit procedures consists of looking at a process or procedure being performed by others?Observation consists of looking at a process or procedure being performed by others, e.g., the auditor's observation of inventory counting by the company's personnel or the performance of control activities.
What is inspection in audit procedure?An audit inspection generally focuses on the audit process to make sure that auditors have conducted appropriate tests and provided adequate documentation of their conclusions. An inspection finding in the audit process does not suggest that there are undetected material misstatements in the financial report.
What is inspection or observation process?Observation and inspection are two procedures used when performing tests of control. Observation means being physically present when the client performs the internal control procedure, while inspection involves examining documents for proof that the internal control procedure was performed.
What audit procedures will be performed?Audit Procedure Methods. Substantive audit procedures. ... . Analytical audit procedures. ... . Inquiry. ... . Confirmation. ... . Observation. ... . Inspection of documents. ... . Inspection of physical or tangible assets. ... . Recalculation.. |