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DefinitionsAudit risk and assuranceIt is not normally practical or cost-effective for auditors to collect evidence in order to have absolute (100%) assurance or confidence of detecting all material deviations. Instead, auditors try to ensure that their conclusions and opinions are based on reasonable assurance, which is obtained from the audit work. Audit risk is the inverse of audit assurance. It is the risk that the auditor is willing to tolerate coming to a wrong conclusion. In practice, audit risk is unavoidable. PrinciplesComponents of audit riskThe components of audit risk are:
Assessment of risks is a judgement rather than a precise measurement. The level attributed to each component is estimated by the auditor on the basis of his/her professional judgement, informed by the procedures outlined below. Audit risk modelThe audit risk model, as shown below, helps auditors to determine how comprehensive the audit work must be so as to attain the desired assurance for their conclusions. [label stroke="true"]Audit risk (AR)= Inherent risk (IR) x Control risk (CR) x Detection risk (DR)[/label] This equation must always be in balance. The higher the auditor assesses the level of inherent and/or control risk to be, the lower the detection risk must be. This requires more substantive audit work (larger sample sizes). Equally, the lower the combined inherent and control risk is assessed to be, the higher the detection risk will be. This in turn means less substantive work and more systems work. More systems and controls need to be tested as the planning assumption must be verified and because the systems work also contributes to the overall assurance. Fraud risk is an element of both inherent and control risk.When to consider audit riskAudit risk should be considered when:
InstructionsProcedures to identify and assess riskThe risk-assessment procedures are employed in order to gain an understanding of the following:
The nature and extent of planned audit tests will vary, depending on the auditor's assessment of both inherent and control risk (see Assurance model). The auditor should perform risk assessment procedures as early in the audit as possible, based on various sources of information.
The entity’s own risk-assessmentThe entity's own risk-assessment process can be a source of information. The following important information should be considered as part of the risk assessment for compliance audits:
At the Commission, the DGs establish their own accounting risk analysis per process and per audit assertion. This represents a substantial input to the risk-assessment process for financial audits. However, the auditor should exercise [a-glossary term="professional%20scepticism"]professional scepticism[/a-glossary] , as risks identified by the auditee may not address those that are of importance for audit purposes, and such information may be biased. The ECA's previous work, and the knowledge and experience of the audit chambers should always be considered for both, financial and compliance audits. Where the auditor intends to use such information he or she should determine whether changes have occurred since the previous audit that may affect its relevance to the current audit. This is because changes in the control environment, for example, may affect the relevance of information obtained in the prior year. [/toc-this]What are the steps in the risk assessment process?Step 1: Identify the hazards.. Step 2: Decide who might be harmed and how. ... . Step 3: Evaluate the risks and decide on precautions. ... . Step 4: Record your findings and implement them. ... . Step 5: Review your risk assessment and update if.. What are the 5 steps to undertaking a risk assessment?You can do it yourself or appoint a competent person to help you.. Identify hazards.. Assess the risks.. Control the risks.. Record your findings.. Review the controls.. What are the 3 process of risk assessment?Risk assessment is the name for the three-part process that includes: Risk identification. Risk analysis. Risk evaluation.
What are the four 4 main elements in the risk assessment process?The risk assessment process consists of four parts: hazard identification, hazard characterization, exposure assessment, and risk characterization.
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