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many questions have asked to identify the audit risks and the auditors response to each risk in planning the audit ….how to identify audit risks and how to respond to those risks as an auditor? is there any planned procedure please help me out with details of it..
1- For your ease, lets say if their are two different audit firms (A & B) and those are conducting an audit of a company which is located in UK and its subsidiary in say Pakistan. So whats the audit risk here ? See the audit risk is RELIANCE on other auditors(B) of different country for e.g risk is that u r putting too much reliance on other auditors(B) work, there conclusions, there opinions, there workings etc.
As its possible they dont know how to check the accuracy of complex IAS-39 issues or say IAS-19 calculations etc.. which could be very material and critical for any organisation.2- So how would u plan, as take in how would u response to these situations n planning or conducting ur audit ? :
You would assess there qualification, reputation, experience and client base etc, so a formal confirmation of there independence could also be required if u suspect on there integrity.Conclusion:
So to identify audit risks you have to assume several kinds of possibilities of errors that could arise in a question and then provide there resolution. For e.g it is possible that inventories may me misstated or not recorded correctly like Lower of cost or NRV.
How would u response to this risk ? U will consider the nature of the inventory, if its seasonal then the remaining inventory in the stock should be impaired or check for the obsolescence etc u know to value them at NRV. as it should be.I hope it would help.
Audit risk depends on inherent risk, control risk and detection risk.
Inherent risk: the risk of an error occurring in the first place. The scenario will give information about this eg: complex transactions, new systems, new staff, time pressure, cash intensive, valuable inventory, many locations between which inventory is transferred.
Control risk: the risk that the client doesn’t pick up an error one it’s made. Typically, bad internal control. Eg if there is no segregation of duties, no authorisations or approvals, no reconciliations, no inventory counts. Again the scenario will include information about this.
So, the scenario sets out the problems – rarely does ‘good news’ figure in a scenario, so be suspicious about everything your are told.
Detection risk is essentially how the auditor responds to the inherent and control risk. So if there is vulnerable inventory that the client does not count during the year or lock away, the auditor will have to look carefully at any year-end stock count. If the client has changed its IT system part way through the year then the auditor will respond to the risks by looking carefully at the transfer of balances and also processing in the first month of the new system where more errors are likely as staff learn how to operate it.
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