Learning objectives
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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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Learning objectives

Learning Objectives

  • Illustrate risk model

  • Determine level of OAA

  • Identify risks

  • Calculate detection risk

Slide4.1


Session overview

Session Overview

  • Purpose of identifying and assessing risk

  • Components

  • Factors influencing risk

  • Risk model

  • How to assess risk

Slide4.1


Inherent risk

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


Inherent risk short definition

Inherent Risk(short definition)

The risk of material error occurring in the first place

Slide4.1


Control risk

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.

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Detection risk

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.

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Overall audit risk

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.

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The audit risk model

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

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The relationship between ir cr dr and ar

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

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Substantive work level matrix

Substantive Work Level Matrix

Assessment of control risk

Assessment

of inherent

risk

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Risk model steps

Risk Model Steps

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Learning objectives 7079267

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

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Assurance guideline

Assurance Guideline

95 % : Most common level

97 % : Few sensitive entities

99 % : Extremely sensitive cases

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Learning objectives 7079267

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

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Learning objectives 7079267

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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