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I’m finding it difficult to differentiate what answer is required in questions that ask for the RoMM/ FS risks and questions that ask for audit risk.
I understand that the audit risk deals with the risk of detection and is also closely related to RoMM risks but how does one go about answering a question asking for audit risks? I don’t quite believe that what they want is a statement that the auditor may not detect the misstatement of receivables due to say the balance not being translated at the closing rate at year end. It seems like just a restatement of the RoMM.
Any assistance would be greatly appreciated.
Audit risk is the risk of issuing an inappropriate opinion.
Consists of two elements – ROMM and Detection Risk
ROMM consists of two elements – Inherent risk and control risk
Where a question asks you for audit risk your answer should include “inherent, control (therefore ROMM) and detection risk”
Now identify how / where the scenario involves any or all of these risks fro the auditor
OK?
I’m still a tad confused. For a question done which asked for the audit risks the lecturer gave the following response:
“*Audit risk states controls are weak*
Provisions may be understated if the company has suffered litigation for loss of customer data or if the company was fined for non-compliance with the data protection act.”
This answer sounds like RoMM as it speaks to the effect on the financial statement. Could you indicate if my thinking is correct and a possible way to restate to answer the audit risk question?
““*Audit risk states controls are weak*” ? ? ? ? ? !
The controls are not necessarily weak. Admittedly, if the controls are weak then that would necessitate a lowering of the detection risk by decreasing / lowering the materiality level
But there is still audit risk where controls are strong. For example the auditor may elect to reduce the extent of substantive work by abnormally increasing materiality levels without appropriate justification. That would result in an unacceptably high audit risk
Okay, I took that from someone’s notes for that class as I missed it so I hoped it was a mistake as our lecturer’s handwriting is sometimes illegible. But with regards to the second part. That answer seems like a comment on the FS and seems acceptable as a response to a question about ROMM but not audit risk. Nothing speaks to the not being able to detect. How would I rephrase this as a response to an audit risk question? I find I learn better with a practical example.
By changing (increasing or decreasing) materiality levels, the auditor is increasing or reducing (respectively) the level of detection risk – the only element of audit risk that is in the power of the auditor to adjust
That answer of mine is of direct relevance to your question about audit risk!
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Financial Statement Risk and ROMM is same or difference & and how i interrelate Business Risk to ROMM my understanding is Inherent Risk Or Business Risk both are same.
Check out this site:
Pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_8.aspx
and look particularly at paragraphs 5, 6 and 7
I decided to look at an past paper and the exam answer sheet on ACCA global’s website so now I have a feel for how to answer the question.
I suggest that you read paragraph 5 in that document again. To use one of my favourite expressions, it suggests that all elephants (financial statement risks) are animals (risks of material misstatement) but not all animals are elephants
I really do believe that that answers your question – unless I have misinterpreted your question
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