Define audit risk?

Definition

Audit Risk is the risk that an auditor expresses an inappropriate opinion on the financial statements.

Explanation:

Audit risk is the risk that an auditor issues an incorrect opinion on the financial statements. Examples of inappropriate audit opinions include the following:

• Issuing an unqualified audit report where a qualification is reasonably justified;
• Issuing a qualified audit opinion where no qualification is necessary;
• Failing to emphasize a significant matter in the audit report;
• Providing an opinion on financial statements where no such opinion may be reasonably given due to a significant limitation of scope in the performance of the audit.

Model:

Audit Risk   =   Inherent Risk   x   Control Risk   x   Detection Risk

Audit risk may be considered as the product of the various risks which may be encountered in the performance of the audit. In order to keep the overall audit risk of engagements below acceptable limit, the auditor must assess the level of risk pertaining to each component of audit risk.

Components:

Explanation of the3 elements of audit risk is as follows:

Inherent Risk is the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls (factors that may cause a misstatement due to absence or lapse of controls are considered separately in the assessment of control risk).

Inherent risk is generally considered to be higher where a high degree of judgment and estimation is involved or where transactions of the entity are highly complex.

For example, the inherent risk in the audit of a newly formed financial institution which has a significant trade and exposure in complex derivative instruments may be considered to be significantly higher as compared to the audit of a well established manufacturing concern operating in a relatively stable competitive environment.

Control Risk is the risk of a material misstatement in the financial statements arising due to absence or failure in the operation of relevant controls of the entity.

Organizations must have adequate internal controls in place to prevent and detect instances of fraud and error. Control risk is considered to be high where the audit entity does not have adequate internal controls to prevent and detect instances of fraud and error in the financial statements.

Assessment of control risk may be higher for example in case of a small sized entity in which segregation of duties is not well defined and the financial statements are prepared by individuals who do not have the necessary technical knowledge of accounting and finance.

Detection Risk is the risk that the auditors fail to detect a material misstatement in the financial statements.

An auditor must apply audit procedures to detect material misstatements in the financial statements whether due to fraud or error. Misapplication or omission of critical audit procedures may result in a material misstatement remaining undetected by the auditor. Some detection risk is always present due to the inherent limitations of the audit such as the use of sampling for the selection of transactions.

Detection risk can be reduced by auditors by increasing the number of sampled transactions for detailed testing.

Application

Audit risk model is used by the auditors to manage the overall risk of an audit engagement.

Auditors proceed by examining the inherent and control risks pertaining to an audit engagement while gaining an understanding of the entity and its environment.

Detection risk forms the residual risk after taking into consideration the inherent and control risks pertaining to the audit engagement and the overall audit risk that the auditor is willing to accept.

Where the auditor's assessment of inherent and control risk is high, the detection risk is set at a lower level to keep the audit risk at an acceptable level. Lower detection risk may be achieved by increasing the sample size for audit testing. Conversely, where the auditor believes the inherent and control risks of an engagement to be low, detection risk is allowed to be set at a relatively higher level.

It is a very good question; there is a big difference between Business Risk and Audit risk.

However Audit risk is very limited but failure of NOT addressing the other risks appropriately put business at bigger regulatory and financial issues.

Audit risk has traditionally been defined as risk that an auditor will make wrong or misleading assessments. By following a systematic approach and practicing in accordance with the International Standards for the Professional Practice of Internal Auditing, published by the IIA, auditors can reduce such risk by following risk based approach in their audit function.

audit risk also includes the risk that internal audit is working on the wrong projects and/or completing its work in an inappropriate manner.

The risk that an auditor will not discover errors or intentional miscalculations (i.e. fraud) while reviewing a company's or individual's financial statements. There are two general categories of audit risk – risk regarding assessment of the financial materials and risk regarding the assertions produced by evaluation of the financial materials. Companies request an audit in order to provide confidence to investors that their financial statements and reporting are accurate. In order to insure against potential litigation arising from missed financial improprieties, such as material misstatements, auditors will typically carry malpractice insurance.

Audit risk is a risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Audit risk is made up from inherent risk, control risk and detection risk

Audit risk : Is the possibility that the auditor issuing an absolute opinion on the financial statements contain errors or fraud task . It consists audit risk at the balance of the item or type of operations of the inherent risks and regulatory risks and the risk of discovery.The risks inherent risks and control , is to contain the item or type of operations and associated assurances amounts of fraud or errors that may be important to the financial statements as a whole , if added to the amounts of fraud or errors in terms of assets or other types of operations . The risk of discovery, they are not discovered references to fraud or errors task that may contain financial statements. The financial statements that contain errors or fraud task : Considered the financial statements containing errors or fraud task if the impact of this fraud or errors individually or in the aggregate of such importance that makes these statements are misleading and not presented fairly the financial position and results of operations and cash flows in accordance with generally accepted accounting standards .  Errors:Any incorrect data and non- deliberate in the financial statements , or delete amounts , or non-disclosure of information in the financial statements inadvertently . The errors include the following:• errors in the collection or processing of data which is on the basis of the financial statements.• accounting estimates illogical arising from negligence or unintentional misinterpretation of the facts.• errors in the application of accounting standards relating to the amounts or tab , or view , or disclosure.Fraud :Any false statements in the financial statements intentional or deliberate omission of the financial statements included important information . There are two types of false statements that the auditor should take into account in its review of financial statements that are false statements arising from the distortion and manipulation of financial reports , and false statements arising from the misappropriation of assets.The primary factor in the distinction between fraud and error is whether the act that caused the financial statements to contain false statements intentionally or inadvertently .The inherent risks :One is the ability to contain assurances that the facility management to fraud and errors, the task of imposing the lack of internal control procedures . These are some of the biggest risks in the case of some of some of the assertions and associated balances or types of operations . For example, are likely to contain complex calculations on fraud and errors are more important than simple calculations . The Monetary more susceptible to theft of coal stocks , for example . The accounts , which consists of amounts derived from accounting estimates include a greater risk of accounts that consist of normal data and realistic . And external factors affecting also the inherent risks . For example , technological developments may lead to the obsolescence of a particular product , and then lead it to make the stock more susceptible to inflation . In addition to the factors that relate to confirm that a certain balance of accounts or the type of operations , there are other factors that may be related to a number of balances or balances or all types of operations , may affect the inherent risks related to confirm for a specific account or type of operations . These factors include , for example , the lack of sufficient working capital to continue production , or a particular industry in the decay phase is characterized by the failure of the general level of business establishments .Regulatory risk :Risk control is not done in a timely manner to prevent or detect the presence of fraud and errors can occur in an important one because of the weakness of the assertions in the entity's internal control . The risks related to the regulatory link directly to effectively design and implementation of internal control in achieving the objectives established for the preparation of its financial statements for the facility . It is imperative that there is always some risk oversight due to limitations of internal control self .The risk of discovery :References are not discover the existence of fraud and errors in a task assertions. And risks associated with discovery is directly related to effectively conduct of the audit procedures and the manner of its application by the auditor . These risks arise partly from the elements of uncertainty arising from the failure of the auditor examines100% of the balance of accounts or a type of operations , and other elements of uncertainty exist even if the auditor examines100 % of the account balance or the type of operations. And elements of uncertainty arising from the other references to choose an audit is appropriate , or misapplication appropriate action , or misinterpretation of the results of the audit. Can be reduced by other elements of uncertainty to a negligible level can be omitted by adequate planning , supervision and implementation of the special audit office according to appropriate quality control standards .

which of the following is not generally considered a catagory of audit risk