Entering the world of Audit, it is fundamentally known that risk is an inherent factor. There are several types of risks that auditors assume, audit risk,
1. Audit risk, represents risk to an auditor or an audit firm, as the risk of paying damages to a client may arise out of negligent work when trying to show a true and fair view of a set of company accounts.
All audit work involves some level of risk; this may be because a set of company accounts have been misstated due to error or fraud, or the auditor failed to detect the errors or fraud. In addition, these problems may have occurred due to inadequate sample sizes when determining the level of risk or the auditor failed to use proper auditing policies.
2. Detection risk
a. inherent risk
b. control risk
d. acceptable audit risk
In order to assess the planned detection risk associated in an audit, auditors consider three separate influencing risks: inherent risk, control risk and detection risk.
Inherent risk were environmental factors, (background knowledge of the client and were past audits indicate no difficulties) are considered against whether or not they would lead to a material error, before considering the 'function of internal controls'.
Next is Control risks were the 'system of internal controls' is assessed against the possability of preventing material error, or detecting it in time using internal controls. Last is Detection risk were the auditors procedures may fail to detect a material error not picked up by the internal controls.
This report explains why the risk-based approach has become popular with external auditors and ...