Audit risk

Audit risk

Audit risk (also referred to as residual risk) refers to acceptable audit risk, i.e. it indicates the auditor's willingness to accept that the financial statements may be materially misstated after the audit is completed and an unqualified (clean) opinion was issued. If the auditor decides to lower audit risk, it means that he wants to be more certain that the financial statements are not materially misstated.

AR = IR*CR*DR

where... IR is inherent risk, CR is control risk and DR detection risk is the conditional probability that the auditor does not detect a material misstatement in the F/S, given that one exists.

DR is split between two components; SR (Sampling Risk) and NSR (Non-Sampling Risk)

  • SR is the risk that the sample selected by the auditor does not properly reflect the population of the data being sampled. The conclusion drawn from such a sample will therefore not be applicable to the entire population.
  • NSR is the detection risk other than SR that the auditor will not detect a material misstatement. This could be due to a variety of reasons eg. human error.


Inherent risk

Main article: Inherent risk

Inherent risk can also be considered as Significant risks. Unlevered beta requires the ratio between the equity value and the value of the firm measured in market value terms. When a company has no debt, i.e. is unlevered, its asset beta is obviously equal to its equity beta.

References

  • Srivastava R.P. & Shafer G.R. (1992) " Belief function Formula for audit risk " Review: Accounting Review, Vol. 67 n° 2, pp. 249–283, for evidence theory applied on audit risk.
  • Lesage (1999)" Evaluation du risque d'audit : proposition d'un modele linguistique " Review: Comptabilite, Controle, Audit, Tome 5, Vol. 2, September 1999, pp. 107–126, for fuzzy audit risk.
  • Fendri-Kharrat et al. (2005)"Logique floue appliquee a l'inference du risque inherent en audit financier ", Review: RNTI : Revue des Nouvelles Technologies de l'Information, n° RNTI-E-5, (extraction des connaissances: etats et perspectives), November 2005, pp. 37–49, Cepadues editions, for fuzzy inherent audit risk.

External links


Wikimedia Foundation. 2010.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • audit risk — 1. In external auditing, the *risk of giving an inappropriate *audit opinion on the *fair presentation of an organization’s *financial statements. The *sampling of transactions and the *compliance testing of controls cannot offer cast iron… …   Auditor's dictionary

  • audit risk — The risk that an auditor fails to qualify the audit report when the financial statements are materially misleading, i.e. do not give a true and fair view. The audit risk consists of three components: • the inherent risk, i.e. the likelihood of… …   Accounting dictionary

  • Audit Risk — 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 …   Investment dictionary

  • external audit risk — See *audit risk (definition 1) …   Auditor's dictionary

  • Risk assessment — is a common first step in a risk management process. Risk assessment is the determination of quantitative or qualitative value of risk related to a concrete situation and a recognized threat. Quantitative risk assessment requires calculations of… …   Wikipedia

  • Risk — takers redirects here. For the Canadian television program, see Risk Takers. For other uses, see Risk (disambiguation). Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable… …   Wikipedia

  • Audit — For other uses, see Audit (disambiguation). Accountancy Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow management  …   Wikipedia

  • risk-based audit — An auditing technique that responds to the risk factors in an audit by assessing the levels of risk attached to different areas of an organization s system and using the results to devise audit tests. The purpose is to focus the audit on the… …   Accounting dictionary

  • risk — The *probability of the occurrence of an event with negative consequences. The IIA defines risk as the probability that an event or action, or inaction, may adversely affect the organization or activity under review (quoted in Hermanson and… …   Auditor's dictionary

  • audit plan — audit planning memorandum; = audit strategy A document outlining the strategy to be applied to each manageable area of the accounting system and financial statements of an audit client. The plan would take into account the assessed levels of… …   Accounting dictionary

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”