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Elements of audit risk and why the auditor needs to consider audit risk ?
Audit risk refers to the risk that the auditor may express an inappropriate audit opinion on the financial statements, failing to detect material misstatements. It comprises three primary components:
01. Inherent risk,
02. Control risk and
03. Detection risk.
01. Inherent risk:
inherent risk is the susceptibility of an assertion to misstatement that could be material, individually or when aggregated with other misstatements, assuming that there was no related internal control.02. Control risk:
This type of risks refers to the risks of misstatements and errors in the company’s financial statements as the company fails to manage its internal controls well.
03.Detection risk:
This means that the auditor fails to detect the misstatements and errors in the company’s financial statement, and as a result, they issue a wrong opinion on those statements.The auditor needs to consider audit risk because:
Professional Responsibility:
Auditors have a professional responsibility to express an opinion on the financial statements that is appropriate in the circumstances. Failing to consider and mitigate audit risk could lead to issuing an incorrect audit opinion, damaging the auditor's reputation and credibility.
Reliability of Financial Reporting:
Users of financial statements rely on auditors to provide assurance on the accuracy and reliability of the information presented. Considering audit risk ensures that the auditor performs sufficient procedures to provide reasonable assurance that the financial statements are free from material misstatement.
Efficient Allocation of Resources:
Considering audit risk allows auditors to focus their efforts on areas where the risk of material misstatement is highest. This ensures that audit resources are allocated efficiently and effectively, optimizing the audit process.
Legal and Regulatory Requirements:
Auditors are subject to legal and regulatory requirements that mandate the consideration of audit risk in performing an audit. Compliance with these requirements is essential to maintain the integrity and independence of the audit process.
In finally:
By understanding and assessing inherent risk, control risk, and detection risk, auditors can plan and execute audit procedures that are tailored to the specific circumstances of the engagement, thereby providing assurance that the financial statements are free from material misstatement.