(Question and Answer): Assignment 1: Discussion—Audit Risk Model

Audit risk model shows the various risks which are associated with the conduct of audit and also the procudeures to reduce the risk level. It is the duty of the auditor to understand the entity, environment and its control before starting the audit procedures. While planning the audit the auditor will look into every area of the entity and will get an understanding of the risk areas of the organization. Wherever the auditor feels the risk level is high , the auditor will plan out audit strategies to determine the degree of risk and procedures to reduce the risk as well. Identifying and assessing the risk is the major component of Audit risk.

Mathematically Audit risk= Inherent risk*Control risk*Detection risk.

The risks which should be assessed during the Audit procedures can be categorized as-

1. Control Risk- It is risk which is caused by the loss of Internal control within the organization. A material misstatement can go undetected if there is a lack of internal controls within the company. Control risk can be a result of an error or fraud, but if go undetected or un prevented can result in misrepresentation of the financial position of the company.
2. Detection risk-detection risk is the risk that the methodologies adopted by the auditor will not detect a misstatement that already exists in the company. Detection risk depends on the procedures adopted by the auditor and their implementation. The level of audit risk is inversely related to detection risk. As there is a huge reliability on the auditor , it is very important to assess all the detection risks in an audit procedure.
3. Inherent risk-Inherent risk is the risk that error, omission or misstatement will occur in the financial statement due to some inherent factors or uncontrollable factors and will get unnoticed during audit procedures.

Example

During the conduct of an audit of a FMCG MNC our audit team noted the following information regarding the for consideration in the risk assessment of the assignment:

There is a lack of Segregation of duties which is hampering the maker checker concept of organization. Various misrepresentations were also noticed because of this. This is the result of loss in Internation control of the company .