Page 47 - CA Inter Audit PARAM

CA Ravi Taori
Discuss the types of inherent, control and detection risks as perceived by the auditor.
Answer

➢ Audit Risk:
An auditor’s judgement as to what is sufficient and appropriate audit evidence is affected by the
degree of risk of misstatement. Audit risk is the risk that an auditor may give an inappropriate
opinion on financial information which is materially misstated.
• For example,
o An auditor may give an unqualified opinion on financial statements without knowing
that they are materially misstated.
o Such risk may exist at overall level, while verifying various transactions and balance
sheet items.

As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the risks of material misstatement at the assertion level
consist of two components:
• Inherent risk and
• control risk.

Inherent risk and control risk are the entity’s risks; they exist independently of the audit of the
financial statements.

The nature of each of these types of risk is discussed below-
• Inherent risk:
It is the susceptibility of an account balance or class of transactions to misstatement that
could be material either individually or, when aggregated with misstatements in other
balances or classes, assuming that there were no related internal controls. External
circumstances giving rise to business risks may also influence inherent risk.
o For example,
Technological developments might make a particular product obsolete, thereby
causing inventory to be more susceptible to overstatement.

• Control Risk:
o It is the risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either
individually or when aggregated with other misstatements, will not be
prevented, or detected and corrected, on a timely basis by the entity’s internal
control.
o It is a function of the effectiveness of the design, implementation and
maintenance of internal control by management to address identified risks that
threaten the achievement of the entity’s objectives relevant to preparation of
the entity’s financial statements .
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