Tutorial Week 4

Audit Risks have three elements being:

Inherent Risk (nature of the business)– Arises because of the nature of the business

or company. i.e. Company that’s works with predominately with cash or jewellery.

Inherent risks come before control risk. These risks are before internal controls are

implemented. Inherent risks before any internal controls are implemented. Auditors

can only asses inherent risk, not change inherent risk -> look to keep it as a

minimum

Control – Risk the company’s internal controls do not work effectively or prevent

fraud. Auditors assess control risks. If they are not operating effectively, at the end

of the audit they have to give suggestion to management on how to improve the

internal controls.

Detection – Won’t be able to detect material risk statements. Determined by the

auditor. Failed to detect material misstatement. Audits can change the risks by

selecting more samples.

If inherent risk and control risks are high, the auditor will have to lower these risks by

selecting more samples for testing. Auditor needs to apply more audit procedures

Business risk – affects the whole financial statements i.e. Cost of fuel increases

expenditure and affects profitability of the whole company. Business risk is also when a

whole company shuts down due to a lockdown.

Versus inherent risk where inventory gets stolen i.e. Clothes, where inventory balance

is affected but won’t change the sales and net profit balance.

Higher detection risk means inherent and control risks are low, meaning the auditors

can test less. Vice versa

When risk of material misstatements is likely to occur – auditor’s will set a lower

threshold for materiality. Vice versa. i.e. Poor internal controls lower threshold, good

internal controls higher materiality threshold.

Misappropriation of assets – Stealing items

Accg3040 week 4

Auditing and Assurance Services (ACCG340)