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Hey guys,
A question: could anyone share his thought/understanding about audit risks, business risks and risks of material misstatements. I read the revision kit for the exam and I totally understand that these types of risks are completely different. BUT the questions per the revision kit confusing me: if it is asked to list/explain/identify audit risks, the answers allow ot conclude that these risks are same. HELP.- Topics: 0
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Hi,
I think that business risks can form a basis for identifying some of the audit risks in any scenario, particularly when using a risk based audit approach.
Both audit risks and business risks help us identify areas where we are likely to find material misstatements. Remember that material misstatements refer to any wrong information caused by either error or omission which would affect the decisions of users of financial statements.
Business risks can be categorised into financial, operational or compliance risks. On the other hand, audit risks can be categorised into inherent, control and detection risks.
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Once again: I thought that audit risk is related to the risk that the auditor issue a wrong opinion based on his work. And the risk can be breakdown into inherent, control, control and detection risk.
Thus, if we take a regular manufacturing company, can anyone list these risks (just one) for audit, business and RoMM.
This BPP revision kit drives me nuts.
Audit risk – the risk of auditor expressing the wrong opinion on the financial statements.
Audit risk is a function of inherent risk, control risk and detection risk. The auditor only has control over the detection risk (using resources, increasing sample sizes, supervision, involvement of an auditor expert, professional skepticism).
The inherent risk and the control risk together make up the risk of material misstatement (or, ROMM). Think about it like this, if RoMM is high (no controls, naturally risky account), we will increase our sample sizes so that we can detect more.
The aim is to reduce audit risks to an acceptable level so that we can support the opinion.
The above are all considered to be financial risks.
Business risks are risks that the entity will not meet its objectives efficiently, effectively or economically (the 3 E’s).
While an external auditor is mostly concerned with financial risks, an internal auditor is probably concerned with both business and financial risks.
However, external auditors can assess business risks for the purposes of gaining assurances over assertions made on the financial statements. A particular frequent occurrence of this, is assessing the use of going concern as a financial statement level assertion.
For example, a business may budget that it will make a loss due to obsolescence in technology. That loss may lead to a default on interest payments. If that default occurs, the entity may no longer be a going concern. Now we must gain additional evidence over going concern as there is a doubt over it and perhaps the financial statements will need to be stated on a break-up basis. The business risk has financial implications.
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Thanks guys, now I am feel more comfy about this topic. I wish I could give you an exemption for the ACCA P7.
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manufacturing company
audit risks
Control risk: internal controls being weak, quality defects in manufacturing
Inherent risk : highly volatile industry
Detection risk: not being able to identify all related party transactionsBusiness Risks
Financial: new entrants to market hence selling prices going down
Operational: high senior staff turnover
Compliance: fines, penalties paid by the company. Changes in regulation, law.ROMM
Control Risk: weak purchasing systems may result stolen assets hence over valuation of assets in the SOFP
Inherent Risk: complex group accounts, ie. related party tranx, foreign subs, needing expert valuations affecting the figures in all FS- Topics: 0
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@sicily said:
revision kit confusing me: if it is asked to list/explain/identify audit risks, the answers allow ot conclude that these risks are same. HELP.know what you mean.
just change the *hat* you are wearing when answering this question.
i.e . Business risk is asked : then wear your *MGT HAT* and think what can go wrong in your company.. think pestel, swot if they help you finding problems ( risks! )
if ROMM is asked, wear your *AUDITOR HAT* think as if your are looking at draft FS’s. what could be over valued, under valued, omitted?
if Audit risk is asked; yet again wear your *Auditor Hat* and think how you could give a wrong audit opinion. ie. in a complex group with foreign subs, you have to work with component (possibly foreign as well) auditors and there is a risk of you putting too much reliance on their work while their work actually being poor quality – this would be one component of your audit risk : goes under inherent risk . Remember AR = Control X Inherent X Detection Risks
AR, BR and ROMM they all feed each other and relate somehow. that is why the revision kit looks rather confusing. but changing your Hat will keep your answers precise
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