Question

a- What is the importance of the Auditor’s Risk Assessment process? one paragraph.(200 words max)

b- Discuss how does internal control assessment affects the audit risk model? one paragraph (200 words max)

Answer 1

a. Importance of the Auditor's risk assessment process -

Auditor is required to identify and assess the risk of material misstatement, whether due to fraud and error, at the financial statement and assertion levels.

Risks at the financial statement level may derive in particular from deficient control environment. Auditor identify risks through out the process of understanding of the entity and its environment, including relevant controls that relate to the risks and by considering the classes of transactions, account balances and disclosures in the financial statements. Auditor performs risk assessment procedures so that no inappropriate audit opinion is formed. Risk is avoided that the auditor may fail to express an appropriate opinion in an audit assignment.

b.

Audit risk model is =

Inherent risk × control risk × detection risk.

Internal control is referred to as policies and procedures established by the entity to provide reasonable assurance that the objectives of an entity are achieved. Risk of material misstatement comprises of inherent risk and control risk. Detection risk is the risk that an auditor's substantive procedures will not detect a material misstatement that exists in an account balance or class of transactions. The higher the risk of material misstatement, the more audit evidence the auditor should obtain from the performance of substantive procedures. When both inherent and control risks are assessed as high, the auditor needs to consider whether substantive procedures can provide sufficient appropriate audit evidence to reduce detection risk and therefore , audit risk to an acceptably low level.