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Hello. This is the fourth of
our talks about auditing.
David Hay from the
University of Auckland.
Today, we're talking
about audit risk
and the audit risk model.
How do auditors know what
areas to concentrate on?
Previously, we talked about
assertions and materiality,
and how the list of
assertions gives them
a checklist of what
areas to look at.
Materiality helps them decide
what areas are important
to concentrate on.
But auditors do a lot more than
that in focusing their work.
What they do is take
account of the risk,
and particularly business risk.
That's the type of auditing
that we do these days.
In previous centuries,
other types of auditing
might have been done
concentrating on
systems, for instance,
concentrating on
the balance sheet.
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Now, auditing is pretty
much universally
done with the audit risk
model, risk-based auditing,
taking into account
business risk.
The auditing standards
are designed that way.
If anyone asks you what sort of
auditing we're talking about,
you can tell them
risk-based auditing.
We're looking at business risk,
and we're looking at other
risks related to accounting.
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The audit risk model takes
account of the different
types of risk that
auditors need to consider,
risks that might affect
the financial statements
and planning the audit.
The audit risk model
is really saying
there's an overall audit risk.
It's the risk of getting
the audit wrong,
it's defined as issuing
an inappropriate opinion,
saying that the financial
statements are not materially
misstated when they
really are misstated.
The risk is that they really
are materially misstated,
and they issue the
wrong opinion.
We say the financial
statements are fine
when they're not fine.
There's something
wrong with them.
How could that happen?
It's because one of the risks
in the audit risk
model has occurred.
The audit risk model is a
very simplified equation
that takes into account the
factors that affect audit risk.
The audit risk is that of
getting the opinion wrong,
and it's affected
by inherent risk,
control risk, and
detection risk.
Those are the three
factors that we look at.
Those three factors all
interact with each other.
We want to keep our audit risk
down to a low, manageable level,
if one of the other
risks changes, we've got
to make some adjustments
to take account of that.
Let's go through these risks.
Inherent risk. Inherent
risk is the first one.
