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Hi Fellow Students,
Just wondering if anyone could possibly help with the above topics?
I keep getting confused, any possible examples that could help me understand an keep me on track? (would be great)
I define both risks as:-
Inherent risk- financial statements materially misstated (that could be via any of the processes up till the prep of FS)
Control risk- weak controls.. such as controls that do not detect material error (planning stage?)
it can be understood better by examples.
suppose say,
suppose a company trades oversees, it can make loss or gain on transactions corrresponding to foreign exchange rate movement and may not be accounted properly. this is an inherent risk.suppose another company is trading goods where goods have short life like 2 0r 3 days only. there is an inherent risk of inventory overstating.
suppose another company is providing architectural design, there is a inherent risk overstating the service fee, which may be complex for auditor to determine the basis for the fee.
control risk is where there is no sufficient internal control is established to prevent or detect the fraud.
to find a control risk, you take procedures followed in the company and check whether an individual can do error or fraud at any stage.
for example,
sales can be ordered through the emails and products are delievered at customer house.
emails are read by 3 employees in sales department.
and company has no control whether all emails are read or not .
there is a control risk.
if company has sufficient control to determine whether all emails are read and processed. then there is no control risk.you will get more examples when doing past exam questions.
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