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Concept of Audit Risk

Definition ;
In an audit of financial statements, audit risk is the risk that
the auditor expresses an inappropriate audit opinion when
the financial statements are materially misstated
Examples of inappropriate audit opinions :
Issuing an unqualified audit report where a qualification is
reasonably justified;
Issuing a qualified audit opinion where no qualification is
necessary;
Failing to emphasize a significant matter in the audit report;
Providing an opinion on financial statements where no such
opinion may be reasonably given due to a significant
limitation of scope in the performance of the audit.

Concept of Audit Risk (2)


Objective
The objective of the auditor is to conduct
the audit of financial statements in a
manner that reduces audit risk to an
appropriately low level (AS No. 15).If 99%
certainty is desired, the audit risk is 1%

Component
1. Detection Risk 3. In herent Risk
2. Control Risk

Professional Judgment and Audit Risk

In planning the audit, the auditor should use his or her


judgment as to the appropriately low level of audit risk
and his or her preliminary judgment about materiality
levels in a manner that can be expected to provide.
The auditor also uses professional judgment in
assessing control risk for an assertion related to the
account balance or class of transactions. The auditor's
assessment of control risk is based on the sufficiency of
evidential matter obtained to support the effectiveness
of internal control in preventing or detecting
misstatements in financial statement assertions.

Fraudulent Financial Reporting


Misstatements arising from fraudulent financial reporting are
intentional misstatements or omissions of amounts or disclosures in
financial statements designed to deceive financial statement users
where the effect causes the financial statements not to be
presented, in all material respects, in conformity with generally
accepted accounting principles (GAAP).
Fraudulent financial reporting may be accomplished by the
following:
1.Manipulation, falsification, or alteration of accounting records or
supporting documents from which financial statements are
prepared
2.Misrepresentation in or intentional omission from the financial
statements of events, transactions, or other significant information
3.Intentional misapplication of accounting principles relating to
amounts, classification, manner of presentation, or disclosure

Misappropriation of Assets
Misstatements arising from misappropriation of
asset (sometimes referred to as theft or
defalcation) involve the theft of an entity's
assets where the effect of the theft causes the
financial statements not to be presented, in all
material respects, in conformity with GAAP.
Misappropriation
of
assets
can
be
accomplished in various ways, including
embezzling receipts, stealing assets, or causing
an entity to pay forgoods or services that have
not been received.

Pressure
The
need
committing fraud

for

Opportunity
the
situation
that
enables
fraud
to
occur (often when
internal controls are
weak or nonexistent).
Rationalization
the mindset of the
fraudster that justifies
them to commit fraud

Risk Assesment
Procedures
1) Obtaining an understanding of the company and its environment
(paragraphs 717);
2) Obtaining an understanding of internal control over financial
reporting (paragraphs 1840);
3) Considering information from the client acceptance and retention
evaluation, audit planning activities, past audits, and other
engagements performed for the company (paragraphs 4145);
4) Performing analytical procedures (paragraphs 4648)
5) Conducting a discussion among engagement team members
regarding the risks of material misstatement (paragraphs 4953);
6) and Inquiring of the audit committee, management, and others
within the company about the risks of material misstatement
(paragraphs 5458).
Based on the Auditing standard No 12

Brainstorming
Fraud brainstorming is more than sitting around a
table for an hour talking about how fraud could
occur. It involves delving into the details, thinking
like a fraudster and using the knowledge of the
processes to increase awareness of where frauds
may be hiding.

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