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This article outlines and explains the concept of audit risk, making reference to the key auditing standards which give guidance to auditors about risk assessment. Identifying and assessing audit risk is a key part of the audit process, and ISA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment , gives extensive guidance to auditors about audit risk assessment. The purpose of this article is to give summary guidance to CAT Paper 8, Paper F8 and P7 students about the concept of audit risk. All subsequent references in this article to the standard will be stated simply as ISA 315, although ISA 315 is a ‘redrafted’ standard, in accordance with the International Auditing and Assurance Standards Board (IAASB) Clarity Project. For further details on the IAASB Clarity Project, read the article by Lisa Weaver, examiner for Paper P7, in the August 2009 issue of Student Accountant. WHAT IS AUDIT RISK? According to the IAASB Glossary of Terms 1 , audit risk is defined as follows: ‘The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of material misstatement and detection risk.’ WHY IS AUDIT RISK SO IMPORTANT TO AUDITORS? Audit risk is fundamental to the audit process because auditors cannot and do not attempt to check all transactions. Students should refer to any published accounts of large companies and think about the vast number of transactions in a statement of comprehensive income and a statement of financial position. It would be impossible to check all of these transactions, and no one would be prepared to pay for the auditors to do so, hence the importance of the risk‑based approach toward auditing. Traditionally, auditors have used a risk‑based approach in order to minimise the chance of giving an inappropriate audit opinion, and audits conducted in accordance with ISAs must follow the risk‑based approach, which should also help to ensure that audit work is carried out efficiently, using the most effective tests based on the audit risk assessment. Auditors should direct audit work to the key risks (sometimes also described as significant risks), where it is more likely that errors in transactions and balances will lead to a material misstatement in the financial statements. It would be inefficient to address insignificant risks in a high level of detail, and whether a risk is classified as a key risk or not is a matter of judgment for the auditor. RELEVANT ISAs There are many references throughout the ISAs to audit risk, but perhaps the two most important audit risk‑related ISAs are as follows: ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with ISAs ISA 200 sets out the overall objectives of the auditor, and the standard explains the nature and scope of an audit designed to enable an auditor to meet those objectives. References to
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