Title Chapter 3 QB.pdf ✅

Formula: Audit Risk = Risk of Material Misstatement × Detection Risk Risk of Material Misstatement = Inherent Risk × Control Risk Q11: Discuss what is included in risk assessment procedures to obtain audit evidence about the design and implementation of relevant controls. Ans: Risk Assessment Procedure: • SA 315 "Identifying and Assessing Risks of Material Misstatements through Understanding the Entity and Its Environment" defines the term Risk Assessment Procedure as audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. Risk Assessment Procedures include the following: (a) Inquiries of management, and of others within the entity: • Much of the information is obtained by the auditor through inquiry from management and others. However, the auditor may also obtain information, or a different perspective in identifying risks of material misstatement, through inquiries of others within the entity and other employees with different levels of authority. (b) Analytical procedures: • Analytical procedures may help identify the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have audit implications. (c) Observation and inspection: • Observation and inspection may support inquiries of management and others and may also provide information about the entity and its environment. Q.12: The assessment of risks is a matter of professional judgment. Explain stating clearly what is not included in Audit Risk? [MTP-Aug. 18] Ans: Assessment of Audit Risk: • Audit Risk is the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Thus, it is the risk that the auditor may fail to express an appropriate opinion in an audit assignment. • Audit risk is a function of RoMM and detection risk. Assessment of risks is based on audit procedures performed to obtain information necessary for that purpose and evidence obtained throughout the audit. • Assessment of risks is a matter of professional judgment, rather than a matter capable of precise measurement. Professional judgment exercised by an auditor is based on his training, knowledge, and experience. Risks not forming part of Audit Risk: