Detection risk can arise for the following two reasons each of which the

Detection risk can arise for the following two

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by applying the procedures. Detection risk can arise for the following two reasons, each of which the auditor has to address separately: 1. Sampling risk: the risk that the sample is not representative of the population. This is the risk that the auditor’s conclusion based on the sample used would be different had the entire population been subjected to the same audit procedure. Sampling risk can be reduced by increasing the sample size, but cannot be eliminated unless the entire population is tested. 2. Non-sampling risk: the risk of arriving at incorrect audit conclusions by failing to apply appropriate or effective audit procedures. This risk exists even if the auditor applies the audit procedures to the entire population. Non-sampling risk can be controlled through the use of quality-control procedures and by adhering to the auditing standards. Assessment of audit risk Audit risk can be sometimes thought of as a formula: AR = CR x IR x DR. Risk analysis and audit planning can be thought of as: Keep audit risk constant. Adjust DR to take account of IR and CR. When IR or CR is higher, DR must be lower. In every audit, risk needs to be assessed. The relative level of risk influences the audit evidence required. Before issuing an opinion the auditor needs to consider whether the achieved level of audit risk is satisfactory based on the level set during the planning phase. If the achieved audit risk is greater than the planned audit risk, the auditor needs to consider whether to reassess the required audit risk or to lower the detection risk by gathering further audit evidence. If the achieved audit risk is equal to or less than the planned audit risk level, then the auditor can issue an unmodified auditor’s opinion. Business risk Defined as ‘the risk that an entity’s business objectives will not be attained as a result of the external and internal factors, pressures, and forces brought to bear on the entity, and, ultimately, the risk associated with the entity’s survival and profitability. The auditor must have extensive knowledge about the nature of the client’s business and industry in order to determine whether financial report assertions are valid. The auditor must understand the business risks faced by the client in addition to understanding the risks that affect the traditional processing and recording of transactions. Types of audit tests Tests of control: tests of control are performed to obtain evidence about either; 1. The effectiveness of the design of the policies or procedures in internal control. 2. The operating effectiveness of those policies or procedures. These tests may produce evidence to support a lower assessed level of control risk. Substantive tests: are performed to obtain evidence about the validity and the propriety of the accounting treatment of transactions and balances or, conversely, of errors or irregularities therein. These tests reduce detection risk. There are two general subcategories of substantive tests: analytical procedures and tests of details.
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