Page 69 - CA Inter Bhaskar Vol 1

CA RAVI TAORI AUDIT RISK & ITs’ COMPONENTS (QNO-315.01, 315.01.20, 315.01.50, 315.01.60, 315.01.70, 315.01.80,
RISK ASSESSMENT AND INTERNAL CONTROL
AUDIT BHASKAR CH 03 - PART 01 Chart of transaction, balance & Internal Controls (Detailed in SA 530) Non-Sampling Risk
(CNO SA315-P1.020) --
75 1, I.
75 5, Incs.81.4).
75.4, Incs.
ncs.
315.11.50)(MCQ 315.1, 315.4, 315.5, 315.18, 315.26) (MCQ-Incs.18.3, Incs.67.2, Incs.
Sampling Risk
Inherent Risk
Control Risk
Different
Chances that
Types of Risks
Chances that
Assuming no Internal
conclusion
conclusion
Controls chances that
are not able to
obtained from
goes wrong
sampling
prevent / detect
because of
doesn't match with
disclosure are
& correct
inappropriate audit
population
materially misstated
procedure etc.
misstatements
Risk of Material Misstatement (RMM) Combined Risk
(Inherent X Control)Circumstances that transaction, Detection Risk
Chances that material
balance & disclosure presented in financial
misstatements are not
statements are materially misstated.(Prior to Audit)
detected by auditor
Audit Risk
Chances that final opinion given by auditor is inappropriate.
Unmodified opinion is given when modification was required
Chart of
INHERENT RISK
Different
Types of Risks
Initially auditor assumes there are no internal controls and then he
1) Definition determines in which TBD assertions material misstatement can
occur Individually or in aggregate This is called inherent risk.
2) Following factors are related to IR
Shortcut:- RD Burman Factors

Auditor should always go in detail what is root cause of risk. It will
R Reasons
help him to design TOC & SAP for exactly that particular point
E.g. If coal valuation is going wrong because of moisture content,
TOC & SAP should pay special attention to moisture content.

Degree of Inherent risk level can be different in different items. All cannot
D Inherent be treated same
Risk So they should be categorised as high, medium, low or as suitable.

Business risk means chances that business will not be able to
achieve its objectives, means they may fail & incurr losses. Because
Business
B of business loss, asset may reduce or liability may increase.
Risk
So Business Risk has impact on inherent risk of assets
& liabilities
E.g. Obsolescence of FA/Inventory due to change in technology
is business risk which will lead to inherent risk in valuation of
FA & Inventory

F Factors Inherent risk may be impacted because of internal or external factors
E.g. 1) Inherent Risk in Inventory Valuation may increase because
of poor storage facility in company & low demand in industry
2) Further risk in going concern can increase because of lack of
fundsin company & business failures outside company

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