answer difference between financial statement risk and audit risk

Arun, there really is no need to include within your post expressions like “please reply me”. If you post it on “Ask the tutor” I shall get back to you!

It’s a difficult one to answer because financial statement risk and audit risk are (to quote a recent SA article) inextricably intertwined.

Financial statement risk is the risk that the financial statements are materially misstated and it’s a risk faced by the company

Audit risk is the risk that the auditor issues an inappropriate opinion, and that’s a risk faced by the auditor

Does that get you any further?

If a question asks about audit risk, go back to basics!

Audit risk is the risk of issuing an inappropriate opinion.

Audit risk is seen as the product of risk of material misstatement and detection risk

Risk of material misstatement is the product of inherent risk and control risk.

Based on the auditor’s subjective assessment of material misstatement risk, the auditor will be able to establish a level of detection risk that reduces audit risk to an acceptable level.

Once having arrived at that level of detection risk that the auditor is prepared to accept giving an acceptable level of overall audit risk, the auditor is then able to determine materiality amounts to be applied in the course of audit tests.

Now, you take it on from there!

Financial statement risk is, in part, a risk facing the directors of a company in that the accounting records of the company are not sufficient to enable the timely preparation of reliable financial statements

If accounting controls and / or internal controls are lacking in their effectiveness, then the processes of recording transactions may not be relied upon giving rise to financial statements which are potentially not free from material misstatement

But inadequate accounting controls is not the only potential cause of financial statement risk. If the company does not have a competent finance department (and particularly a competent chief financial officer) then again there exists a risk that the financial statements will contain material misstatement

Again, you take it from there!

The risks of material misstatement need to be identified and classified into IR and CR. they need to be grouped together, identified and explained (dependent upon what the question asks you to do)

The audit risk element can be applied to any risk involved in ROMM and that risk in general terms can always be summarised as the risk of issuing an inappropriate opinion

But you can do better than just the generic comment.

Take as an example an IR of the entity launching a new business venture

The audit risk (of issuing an inappropriate opinion) is expanded upon by saying something like “The directors have undertaken a business venture where they have no experience. The chances of the company failing to apply all relevant laws, rules and regulations is thereby increased and the auditors will need to plan their work on the assignment to pay particular attention to the procedures adopted for the identification and compliance by the client with those laws, rules and regulations”

I’m trying to illustrate how it’s always possible to EXPLAIN why and how audit risk is affected

Did I succeed?

It’s not possible to generalise like that – each question needs to be taken on its own merits

I find that one of the frequent problems faced by students is their ability to misinterpret what a question is asking for.

Before you commit pen to paper, it’s well worth the trouble to read the question requirement two or three times just so that you’re clearing your head what’s being asked.

When you do this, try to put emphases on different key words each time you read the requirement

This is not a good example, but it does illustrate the point

THIS is not a good example, but it does illustrate the point

This is NOT a good example, but …..

This is not a GOOD example, but …..

This is not a good EXAMPLE, but …..

Each different emphasis gives a different meaning to the collection of words

If you do that to a question requirement, it should focus your mind better as to what exactly the examiner is looking for. Try it and see if it works

Thanks Noura

And thank you Sharmeen