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Explain audit risk and the components of audit risk. (5 marks)
Can you please help with the below. My answer is how I understand and have been taught audit risk. ACCA solution (below) is very different. Does my answer in the exam have to exactly match the solution to achieve full marks? WIll my answer achieve anything in the exam? Many thanks
MY ANSWER:
Audit risk is the risk of the auditor making an inappropriate opinion based on the the financial statements – issuing a true and fair opinion on a set of financial statements when they contain a material misstatement.
Audit risk is made up of inherent risk, control risk and detection risk.
Inherent risk: The risk that a material misstatement exists in the accounts due to the nature of the entity and industry it operates in.
Control Risk: The risk that the auditor issues an inappropriate opinion due to insufficient controls resulting in a material misstatement.
Detection Risk: The risk that the auditor misses a material misstatement due to insufficient design and implementation of audit procedures.
Inherent risk and control risk cannot be controlled by the auditor but these risks can be mitigated through the implementation of increased audit procedures, which will decrease detection risk.
SOLUTION:
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of two main components being the risks of material misstatement and detection risk. Risk of material misstatement is made up of two components, inherent risk and control risk.
Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
Control risk is the risk that a misstatement which could occur in an assertion about a class of transaction, account balance or disclosure and which could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement which exists and which could be material, either individually or when aggregated with other misstatements. Detection risk is affected by sampling and non-sampling risk.
Even if you were to be asked such a question in AA (which is unlikely given current exam style and standard), answers do not have to “match exactly” – it’s the “gist” that is important.
If you take a look at page 54 of our notes you will see that your explanation of control risk is not clear. The point that has to be made is that the client’s system of controls fails to identify a misstatement – it’s “audit risk” that it described in terms of the auditor giving an inappropriate audit opinion.
“Even if you were to be asked such a question in AA (which is unlikely given current exam style and standard)”
This question comes from the AA specimen which I passed – is this a good indicator of performance so far or is the specimen more basic than the thing?
While control risk element is not perfect, considering the rest of my answer, is it of an acceptable quality of the standard expected in AA?
I recognise it as the Specimen but this is not indicative of the exam as a whole. You would be lucky to get 5 marks in Section C for anything that you could simply learn.
Your answer would certainly be of a pass standard but you need to be achieving pass standard on Qs on audit risk and responses, internal control deficiencies/tests of controls, substantive procedures. You may find this resource helpful https://opentuition.com/topic/how-to-score-marks-in-aa-essential-guidance-2
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