Describe FIVE audit risks and explain the auditor’s response to each risk in planning the audit?

Audit risk: Audit risk Represents the risk of auditor failure to adjust his or her report appropriately to reflect any material misstatement of the financial statements. Audit risk components: Audit consists of three components of risk are: 1. inherent risks: The probability of a material error in the estimates of an account without taking into account the internal control procedures. The calculations and estimates differ. The risk is assessed using several analytical methods, as well as using the information available about the entity and industry as well as using comprehensive audit information. 2. Internal Control Risks: The potential for inability to prevent or detect a material error is timely in the internal control system and internal control risks are assessed using the results of the internal control system tests. 3. The risk of discovery: The likelihood that the auditor's procedures will lead to the conviction that there is no intrinsic error while such a mistake exists is based on verification tests primarily to reduce the risk of discovery. The relationship between audit risk components: The inherent risks and internal control risks differ from the risk of discovery in that they occur independently of the audit while the risk of discovery depends on the effectiveness of the auditor's procedures. The relationship between the audit risk components can be expressed as shown in the following equation: Audit riskInherent risks x internal control risks x discovery risk. On this basis, when any risk is increased, the other will be reduced to keep the audit risk at an acceptable level and therefore the relationship between the inherent risks and the risks of internal control in terms of the risk of discovery on the other hand is inverse.

ِAudit risk is the risk that financial statements are materially incorrect,even though the audit opinion states that financial reports are free of any material misstatements.

* The components of audit risk are  the risk of material misstatement and detection risk

*Detection risk is the risk that auditor`s procedures do not detect a material misstatement,for example an auditor needs to perform a physical count of inventory and compare the results to the accounting records, and this work is performed to prove the  exisitance of inventory.

1. a) Explain the main objectives of internal control in relation to payroll systems,

supported by concrete examples. (Please provide references to support your

answer). (10 marks)

A lot of comments are trying to define audit risk and Audit responses.

That is not the question, the question specifically asks you to find 5 audit risks and the auditor`s responses.

eg:

1) Risk: customers of company X are struggling to pay their dues on time. The risk involved in this is that the receivables in the fianancial statements of company X are overstated.

Response: The auditor should obtain a list of the receivables balances, and for a sample of receivables, check whether a provision for doubtful debts has been made in the statement of financial position. 

(I do not really know if this would be an appropriate response, but based on the examiner`s reports, I am sure that I`m on the right track)