How does an auditor respond to audit risk?
Audit risk is assessed at the planning stage. It is the risk that the auditor may give an inappropriate opinion on the financial statements. The audit risk assessment stops the auditor from sticking their head in the sand, hoping they will just magically find material misstatements. Hoping they will have the time and expertise to manage problems as they stumble across them.
It sets the scene for the rest of the audit, identifying what could cause future headaches for the audit team, and where material misstatements are likely to be found in the financial statements.
Identifying audit risk is just part of the problem. Once an audit risk is identified, the audit team will then need to decide how to manage that risk. How should they respond to a risk that could cause them so many problems?
The auditor responds with bespoke, carefully planned out audit work. This will usually be in the form of specific, concentrated tasks to carry out on problematic balances in the financial statements. It may involve discussions with the directors, inspecting documentation to obtain additional evidence and comparing evidence collected to that which is presented in the financial statements. In essence, the response is a mixture of controls and substantive audit procedures. Gathering evidence.
How does a student respond to an audit risk question?
This is a scenario led requirement. It will be in Section B and you are looking at it carrying between 12-16 marks in the exam. It will come up.
The scenario will hold the answers. There are three things you need to do:
- You will need to apply your knowledge of audit risks to what the scenario describes and literally pull out the audit risks relating to this fictitious client.
- The next step is to explain why you have done this. Why is it an audit risk?
- The final step is to describe what the auditor should do based on the risk that has been identified. If you were planning the audit for the next few months, what specific work would you expect the team to carry out to deal with this problem?
If the audit risk was that your client is new, then the audit risk is that you may not fully understand the entity and its environment. They are new to your firm and your team and so this increases detection risk.
How should you respond to this? Make sure you give your audit team the time to understand. Make sure you create an audit team that can manage this properly. You need more time and more expertise.
The key to managing this type of question in the exam is to be methodical and stay on track. Do not add any more than what the requirement has asked. Start with risks that make you feel comfortable first. Finish on time.
