UNIT 17 - Auditing

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi Everyone,<BR><BR>Can anyone help with the following? <BR><BR>What factors would you consider when assessing the inherent risk of a company? Also how would an auditors approach might be affected if there was a high inherent risk?<BR><BR>Thanks! <BR><BR>

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    UNIT 17 - Auditing

    Hi Heidi<BR><BR>for an inherent risk you may want to consider what kind of business the company is trading in. Businesses in technology, fashion, .com. Also whether the company have good internal controls, if they don't do regular bank recs, sales ledger recs, VAT recs, PAYE rec this may then be considered as being a factor that increases inherent risk. Other factor may include whether key personnel to the company are leaving, not much holiday taken by key personnel, and whether there is pressure on management to perform well....i donâ??t suppose for one minute this list is exhausted â?? there are probably other facts that I have thought aboutâ?¦.<BR><BR><BR>Auditorâ??s approach â?? if the risks appeared to be high (er) then the auditor may decide to carry out more substantive testing approach. The auditor would have probably already tested the controls and made the decision that these couldnâ??t be relied upon, therefore the substantive approach would probably be selected.<BR><BR>If I am incorrect Iâ??m sure that someone will put you (and me) right.<BR><BR>Regards<BR><BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    UNIT 17 - Auditing

    Thanks!!<BR><BR>Ive also got to state what is meant by the following terms?? Its really hard to do homework as we havent been given text books yet!!<BR><BR>- Audit Risk<BR>- Inherent Risk<BR>- Control Risk<BR>- Detection risk<BR><BR>Thanks again!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    UNIT 17 - Auditing

    Audit risk - is the risk that the auditor will come to the wrong conclusion on the financial statements, e.g. say they show a true and fair view when they don't.<BR><BR>Inherent Risk - is the risk that an error will occur in the accounting records, this can be either a genuine mistake, either through lack of experience, complex transactions etc or a deliberate mistake, e.g. the directors manipulating the figures as they are due to be paid a bonus.<BR><BR>Control Risk - the risk that the company's internal procedures will not pick up an error that's been made. e.g incorrect entry in sales day book not detected because they don't do a sales ledger control account. <BR><BR>Detection Risk - the risk that the auditor will not detect the mistake that has not been corrected by the client (i.e. didn't get filtered out by the controls). Can be due to sampling risk - choosing the wrong sample size e.g. through time pressure. Or non sampling risk, e.g. inexperience of audit team.<BR><BR>Overall inherent risk X Control risk X Detection Risk, make up the overall audit risk.<BR><BR>Hope this helps

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