RELEVANT TO ACCA QUALIFICATION PAPER F8 AND

PERFORMANCE OBJECTIVES 17 AND 18

Audit risk

Candidates studying Paper F8, Audit and Assurance, are required under the

syllabus to: ‘Explain the components of audit risk and explain the risks of

material misstatement in the financial statements’.

This element of the syllabus has been examined in the last three sessions of

Paper F8 – in June 2010, December 2010 and June 2011. However, the

performance of candidates has on the whole been unsatisfactory. This article

aims to identify the most common mistakes made by candidates as well as

clarifying how audit risk questions should be tackled in order to maximise

marks.

An example question requirement relating to audit risks is as follows:

Describe the audit risks and explain the auditor’s response to each risk in planning

the audit of XYZ Co.

Previously examined risk questions have carried a mark allocation of 10 marks.

However, a significant majority of candidates have not passed this part of the

question. Common mistakes made include:

? providing definitions of the audit risk model, even though this was not

part of the question requirement

? a lack of understanding of what audit risk is and providing business risks

instead

? not providing an adequate response to the risk. This needs to be from

the perspective of the auditor and not from management’s perspective

? a limited range of risks identified, often just focusing on one area such

as going concern.

Audit risk definitions

Audit risk is defined as ‘the risk that the auditor expresses an inappropriate

audit opinion when the financial statements are materially misstated. Audit

risk is a function of the risks of material misstatement and detection risk’.

Hence, audit risk is made up of two components – risks of material

misstatement and detection risk.

Risk of material misstatement is defined as ‘the risk that the financial

statements are materially misstated prior to audit. This consists of two

components… inherent risk … control risk.’

Inherent risk is ‘the susceptibility of an assertion about a class of transaction,

account balance or disclosure to a misstatement that could be material, either

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