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For the ans to part b)¡¡ where they ask for matters to consider before accepting audit engagement,there is a para like below
“Management are planning a new listing on a foreign stock exchange. This will increase the risk of management manipulation of the accounts, as management may under pressure to report favourable results. Audit risk is also increased by the fact that as a result of the listing, the financial statements will be subject to heavy scrutiny by regulators.”
how does the audit risk increase from the examination of financial statements by the regulators.isnt audit risk the probability of expressing an inappropriate audit opinion ?
Yes, you’re correct … but only to the extent that we use the expression ‘audit risk’ rather loosely
In fact, there’s no risk at all involved in signing off an inappropriate opinion
The risk associated with this action is the risk of the consequences of signing off that opinion
These consequential risks could be either (or both!) financial or non-financial and, in the paragraph above there is a double edged risk
1) the financial statements will be subject to closer scrutiny by regulators, so any inappropriate opinion issued by us is more likely to be discovered by those regulators with their fine-tooth combs
2) as a listed entity there will be (potentially) thousands of directly involved stake-holding shareholders to whom we owe a collective responsibility and it’s typically the case that an action against the auditors of a public listed company tends to be relatively huge in financial terms when compared with actions for negligence against the auditors (if there are any!) of the smaller private entity
I wonder whether the definition of ‘audit risk’ should be expanded to ‘the risk of issuing an inappropriate audit opinion and the resultant consequences, financial and otherwise’
OK?
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