Page 73 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
2A. Factors Influencing IR: The inherent risk is influenced by various factors such as the entity's objectives,
nature of operations, industry, regulatory environment, and its size and complexity. These factors lead to business
and other risks that may result in material misstatements.
2B. Differs for TBD: The risks of material misstatement will differ based on the nature of the account balance
or class of transaction. Some accounts or transactions may carry higher risks due to their complexity, value, or
susceptibility to estimation uncertainty.
2C. Auditor's Attention: Auditors pay special attention to certain risks such as complex calculations that could
be misstated, high-value inventory, accounting estimates with significant measurement uncertainty, insufficient
working capital to sustain operations, a declining or volatile industry with frequent business failures, and
technological developments that could render a product obsolete.
Control Risk (Do they have internal controls in place mitigate the inherent risks?)
1A. Definition: Risk that the entity’s internal control system will not prevent, or detect and correct on a timely
basis, a misstatement that could be material, individually or when aggregated with other misstatements.
1B. Levels
Entity-Level Controls: These controls, such as board oversight, IT general controls, and HR policies, apply to
all assertions and are pervasive across the entity.
Activity-Level Controls: These controls are specific to certain assertions and are designed to address specific
risks.
2A. Management Responsibility: The entity should identify and evaluate its business and other risks, including
fraud, which could lead to material misstatements. In response to identified risks, the entity should design and
implement an internal control system.
2B. Auditor's Role: The auditor is required to understand the entity's internal control system and perform
procedures to assess the risks of material misstatement at the assertion level.
3. Elimination of Control Risk: Despite the implementation of internal controls, some level of control risk will
always exist due to the inherent limitations of any internal control system.
Detection Risk
1. Detection Risk: This is the risk that the auditor will not detect a misstatement that exists in an assertion that
could be
material, either individually or when aggregated with other misstatements.`
2. Inverse Relationship: The acceptable level of detection risk is inversely related to the risks of material
misstatement at the assertion level. As the risks of material misstatement increase, the acceptable level of
detection risk decreases.
3A. Audit Procedures: Auditors identify assertions with risks of material misstatement and concentrate their
audit procedures on these areas.
3B. Non-Sampling Risk: When designing and evaluating audit procedures, auditors should consider the
possibility of selecting an inappropriate audit procedure, misapplying an appropriate audit procedure, or
misinterpreting the results from an audit procedure. Auditors must manage detection risk diligently to ensure
the reliability and accuracy of financial statements. This involves careful selection and application of audit
procedures and thorough evaluation of their results.
Audit Risk
Audit Risk: This refers to the risk of expressing an inappropriate audit opinion when the financial statements
contain material misstatements.
Components of Audit Risk: Audit risk comprises two elements - Risk of Material Misstatement (the risk that
the financial statements contain a material misstatement before the audit) and Detection Risk (the risk that the
auditor will not detect such a misstatement).
The relationship can be defined as
Audit Risk = Risk of Material Misstatement X Detection Risk

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