6 - Audit risk.pdf - Introduction Audit risk Planning \u00a9 2014 Edge Business School a South African company All rights reserv ed This presentation is

6 - Audit risk.pdf - Introduction Audit risk Planning ©...

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© 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Audit risk Planning © 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Introduction Background Formula Financial statement level risks Assertion level risks © 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Background Audit risk © 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Background Once we understand the entity and its environment we can identify and assess the risks in the entity Risks are assessed at two levels Overall financial statement level Assertion level
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© 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Standards ISA 200 – Overall objectives of the independent auditor ISA 315 – Identifying and assessing the risks of material misstatement © 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Formula Audit risk © 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Formula © 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Formula definitions Audit risk – the risk that the auditor will express an inappropriate opinion (MUST always be low) Inherent risk - The natural susceptibility of an item being misstated (high or low) Control risk - The risk that internal control WON’T prevent, detect and correct errors from occurring in the financial statements (only low if the auditor has tested the control and determined it to be effective) Risk of material misstatement – not controlled by auditor, only assessed Detection risk – the risk that the auditor will not identify a misstatement that has occurred (set by auditor, response to assessed risk)
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© 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright. Formula explanations AR must always be low so algebraically: If ROMM is high, DR must be set as low in order to balance the equation The lower the DR, the more work is required to be performed IE Higher risk = more work to be performed If ROMM is low, DR must be set as high in order to balance the equation The higher the DR, the less work is required to be performed IE Lower risk = less work to be performed DR is like a tolerance level The lower my tolerance level, the more work I need to do in order to accept the risk and vica versa © 2014 Edge Business School , a South African company. All rights reserved. This presentation is protected by copyright.
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