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• Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are
determined by the auditor to reduce audit risk to an acceptably low level. It is therefore a function
of the effectiveness of an audit procedure and of its application by the auditor.

QNO— Increased Audit Risk New Course – (SM25)
315.01.80 Bhaskar CNO - SA315.P1.020
Jo Jo Limited is planning to list on Bombay Stock Exchange next year. As an auditor of Jo Jo Limited,
identify any one reason of increased audit risk due to listing of the company next year.
Answer Audit Risk: Audit risk means the risk that the auditor gives an inappropriate audit opinion when the
financial statement are materially misstated. Thus, it is the risk that the auditor may fail to express an
appropriate opinion in an audit assignment.

Jo Jo Limited is planning to list on Bombay Stock Exchange next year. There is a greater chance of
misstatements in the financial statements due to planned listing next year. There could be a possibility of
intentional manipulation of financial statements so that good response is received to proposed issue.
Therefore, there is increased audit risk i.e., risk of expressing inappropriate opinion by the auditor when
financial statements are materially misstated.

QNO Factors for control risk assessment Old Course -- (N20E)
315.02 Bhaskar CNO- SA315-P1.024
What factors are to be considered by an auditor while making control risk assessments?
Auditor assesses control risk as Rely or Not rely on Controls. When making control risk assessments,
consider:
➢ The control environment’s influence over internal control. A control environment that supports the
prevention, and detection and correction, of material misstatements allows greater confidence in the
reliability of internal control and audit evidence generated within the entity. However, it does not
guarantee the effectiveness of specific controls. We, therefore, test the operating effectiveness of
controls over significant class of transactions (SCOTs) when we plan to take a controls reliance
strategy. Conversely, the control environment may undermine the effectiveness of specific controls
and is a key factor in our control risk assessments.
➢ Evaluations of the related IT processes that support application and IT dependent manual controls.
➢ Our testing approach over SCOTs and disclosure processes (i.e., controls reliance or substantive only
strategy).
➢ The expectation of the operating effectiveness of controls based on the understanding of entity’s
processes.

QNO Audit Risk- Exclusion Old Course -- (N18M/M23E)
315.05 Bhaskar CNO- SA315-P1.100
You are appointed as an auditor of Gama Ltd. Your audit assistant wants to understand the meaning of
Audit Risk. Explain him the meaning of Audit Risk with example. Also guide him as to what is not included
in Audit Risk

OR
The assessment of risks is a matter of professional judgment. Explain stating clearly what is not included in
Audit Risk?
Answer Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statements

are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. Thus,
it is the risk that the auditor may fail to express an appropriate opinion in an audit assignment.

Example
Gama Limited purchased a Plant and Machinery for ` 2 Crores in the financial year 2021-2022. The accountant
of Gama limited debited ` 2 crores in the repair and maintenance account in the statement of Profit and loss

instead of taking it to the balance sheet as PPE and claim depreciation on it. While auditing the accounts of

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