Audit Risk in the Brave New World

Material misstatement shall be treated and assessed by the auditors as significant risks. And the auditor shall gather an understanding of the entity’s

Audit Risk Assessment can be done by this Audit Risk Model. This model consists of 3 types of risks i.e., inherent risk, control risk and detection risk. Eventually, audit risk is a product of these 3 types of risks (Griffiths, 2012).

Audit risk is the risk that the auditor gives the wrong opinion – this can either be stating errors when there are none or when there are errors stating that there are none. This risk cannot be eliminated as auditors can only provide a reasonable assurance and not absolute, but instead this can only be managed and reduced to a minimum.

#3. Inherent Risk Factors; audit planning decisions. Businesses that face extreme competition are susceptible to many inherent risk factors – the measurement of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control. Complex valuation issues and related party transactions are two such factors that would affect audit planning decisions. Valuation issues may lead the audit team to request more evidence, if they choose to accept the audit at all. Risks such as inventory turnover leading to potential misstatements of inventory, costs of goods sold, or obsolescence of inventory may influence the audit firm’s decision to hire outside specialists to assist in the audit. Another inherent risk factor, client business risk (competitive

Misstatement in auditing is the difference among the amount, grouping, presentation or disclosure of any reported financial statement element and the amount, grouping, presentation or disclosure mandatory for the element to be in agreement with the pertinent financial reporting framework (Moroney, Campbell, & Hamilton, 2014). Material misstatements can occur due to either fraud or error (ACCA Global, 2014). The auditor ought to ascertain and evaluate the risks of material misstatement right from the financial statement level and the assertion or declaration level (Arens, Elder, & Beasley, 2013). The process involves first gaining an understanding of the organization and its control procedures.

This is the first stage in assessing the risk of material misstatements, where the auditor considers the risk of material misstatement before consideration of any internal controls. This is done at the financial statement level by considering such things as the nature of the business, the industry, and any previous experience with the client.

According to AICPA AU Section 314 (2006), it is important for Price Waterhouse to understand the entity and its environment, in order to evaluate risks of material misstatement. Furthermore, it is their legal obligation (Arens et al., 2012, p. 131).

Following the risk assessment procedures, substantive procedures are designed and conducted to detect material misstatements of relevant assertions. Substantive procedures include analytical procedures and tests of details. Analytical procedures involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data. Tests of details may be divided into three types. One test is the test of account balances to address whether there are misstatements in the ending balance of an account. In the case of Crazy Eddie, auditors should have put greater attention to inventory and accounts payable accounts. The second test is a test of classes of transactions to determine whether particular types of transactions have been properly accounted for during the period. Crazy Eddies fraudulently classified these transshipping transactions as retail sales to inflate its sales revenue and continue growth at existing stores. A key ratio for retailers is to compare growth in existing stores to growth from new stores. The third and final test is a test of disclosures to evaluate whether financial statement disclosures are properly presented. Crazy Eddie prepared bogus debit memos of over $20 million to understate accounts payable.

The way in which audit reports have been documented and presented has slightly changed since the 1940’s whereby the use of guidelines as provided by GAAS (Generally Accepted Auditing Standards) in the documentation and reporting of the report is still in use. The system used for reporting under GAAS within the United States is the pass/ fail model which analysts believe to be a very useful tool for concise and clear assessment of a fair reporting of the audited financial statements of a company. The new set of rules by the PCAOB sets out to seek the presentation of additional information regarding the process of audit pertaining to each business by rolling out new audit standards.

Audit risk is defined as the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated (Soltani, 2007). In Gray and Manson (2007)’s book Audit Risk can be split into three separate elements :

Based on knowledge of the entity and it is environment, the auditor should assess risk of material misstatement at the assertion level and determine the audit procedures

the business. Audit quality refers to different denotations in various business sectors; hence in this paper deliberations of audit quality are limited to professional audit firms within the scheme of Australian Securities and Investments Commission (hereinafter ASIC). Due to the complexity

There are different types of risks in an IT setup which are supported by segregation of duties outlines and formats. Audit risk is a risk that the auditor will issue an unqualified opinion. Being a major aspect prone to fraud, audit risk entails material error can be hardly identified and can go undetected during an information financial audit report. The audit risk however has different classifications.

The core role of internal audit functions is to assist the Board and Executive Management to protect the assets, sustainability and reputation of the organisation. Internal audit functions should execute this role by assessing whether all significant risks are identified, controlled and appropriately reported. They have the responsibility to provide objective, relevant assurance and challenge the effectiveness of governance, risk management and internal control activities within the organisation (Chartered Institute of Internal Auditors, 2014: 1). The Internal Audit Standards require internal audit functions to evaluate the effectiveness of risk management processes and contribute to the improvement of these processes (IIA, 2012: 11 – 12; IIA, 2013a: 1 – 2).

CONTENTS Paragraph Introduction ................................................................................................... 1-4 Audit Engagement Letters ............................................................................. 5-9 Recurring Audits ............................................................................................ 10-11 Acceptance of a Change in Engagement ........................................................ 12-19 Appendix 1: Example of an Audit Engagement Letter Appendix 2: ISA 210 Amended as a Result of ISA 700 International Standard on Auditing (ISA) 210, “Terms of Audit Engagements” should be read in the context of the “Preface to the International Standards on Quality Control,