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Learning Objectives

Learning Objectives. Illustrate risk model Determine level of OAA Identify risks Calculate detection risk. Session Overview. Purpose of identifying and assessing risk Components Factors influencing risk Risk model How to assess risk. Inherent Risk.

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Learning Objectives

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  1. Learning Objectives • Illustrate risk model • Determine level of OAA • Identify risks • Calculate detection risk Slide4.1

  2. Session Overview • Purpose of identifying and assessing risk • Components • Factors influencing risk • Risk model • How to assess risk Slide4.1

  3. Inherent Risk Inherent risk is defined as the risk that in the absence of preventive internal accounting controls, a material error will occur in the accounting process. Slide4.1

  4. Inherent Risk(short definition) The risk of material error occurring in the first place Slide4.1

  5. Control Risk Control risk is the risk that error that has occurred in the component and that could be material, when aggregated with errors in other components, will not be detected on a timely basis by the internal controls in place. Slide4.1

  6. Detection Risk Detection risk is the risk that the auditor’s procedures will not detect error that exists in the component and that could be material when aggregated with error in other components. Slide4.1

  7. Overall Audit Risk Overall audit risk is the maximum risk that the auditor is prepared to assume that error in the financial statements aggregating to more than materiality will remain undetected at the end of the audit. Slide4.1

  8. The Audit Risk Model OAR = IR x CR x DR where: OAR = Overall Audit Risk IR = Inherent Risk CR = Internal Control Risk DR = Detection Risk Slide4.1

  9. RESIDUAL RISK DST SBA THE RELATIONSHIP BETWEEN IR,CR,DR AND AR OAR = IR x CR x DR DR = OAR X CR x IR OAR = 1- ASSURANCE LEVEL DST - Detailed Substantive Testing SBA - Systems Based Assurance (I.e. CR + IR) Assurance Slide4.1

  10. Substantive Work Level Matrix Assessment of control risk Assessment of inherent risk Slide4.1

  11. Risk Model Steps Slide4.1

  12. 1. Starting point is to set the level of overall audit risk; 2. Assess the component risks starting with inherent risk then control risk; 3. Rearrange model and solve DR Slide4.1

  13. Assurance Guideline 95 % : Most common level 97 % : Few sensitive entities 99 % : Extremely sensitive cases Slide4.1

  14. Quality of accounting personnel Number of adjustments Significance of adjustments Judgment involved Inherent Risk Mix of population Complexity Susceptibility to misappropriation Management intentions Factors to Consider WhenAssessing Inherent Risk Slide4.1

  15. Carried out on time Control system working effectively Carried out by staff of appropriate seniority Strength of Control Effectiveness of I.C. Operated adequately Control Risk Recorded in documentary evidence Require collusion to by-pass Control objective is met Independent of processing procedures Factors to Consider When Assessing Control Risk Slide4.1

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