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Factors Affecting Audit Risk

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In planning and performing an audit, auditors assess the risks associated with an audit using various analytical techniques, experience, and knowledge of the company and industry. How is audit risk affected by inherent risk, control risk, and detection risk?

Be sure to substantiate your findings by reviewing Statements on Auditing Standards (SAS) on the American Institute of CPAs (AICPA) website.

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Audit risk is generally referred as the risk, which is found out by an auditor in an incompetent report due to the failure of auditors for observing the misstatement of materials either by the mistakes or scam. According to the auditing standers (SAS), the audit risk depends on the inherent risk (IR), control risk (CR), detection risk (DR) therefore; audit risk could be affected by the complications of these risks (Gray & Manson, 2007).
Impact of inherent risk on audit risk: Inherent risk is the weaknesses of an account balance. Inherent risk is probably changed by the change in the nature and characteristics of business for accounts as like inventory, bills and receivable loans, equipment, plant, and property (Allegrini & D'Onza, 2003). On the other hand, the nature of the business could make a little effect on cash, payable notes, and payable mortgages.
Therefore, it could be able to help for making misstatement that would also ...

Solution Summary

The factors which affect audit risks are determined. The statements on auditing standards are reviewed.

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Suzie Allbright, CPA, risk factors, effect on inherent risk, control risk and risk of material misstatement

Project Overview
Suzie Allbright, CPA, is planning the audit of a newly obtained client, Phillips Energy, for the year ended December 31, 20xx. Phillips Energy is regulated by the state utility commission and because it is a publicly traded company, the audited financial statements must be filed with the Securities and Exchange Commission (SEC).

Phillips Energy is considerably more profitable than many of its competitors, largely due to its extensive investment in information technologies used in its energy distribution and other key business processes. Recent growth into rural markets, however, has placed some strain on 20xx operations. Additionally, Phillips Energy expanded its investments into speculative markets and is also making greater use of derivative and hedging transactions to mitigate some of its investment risks. Because of the complexities of the accounting associated with these activities, Phillips Energy added several highly educated and experienced accountants within its financial reporting team. The Internal Audit department, which has direct reporting responsibility to the Audit Committee, is also actively involved in reviewing key accounting assumptions and estimates on a quarterly basis.

Suzie Allbright's discussion with the previous auditor revealed that the client has experienced some difficulty in correctly tracking existing property, plant, and equipment items. This largely involves equipment located at its various energy production facilities. During the recent year, Phillips acquired a rural electric company, which expanded the number of energy production facilities.

Allbright plans to staff the audit engagement with several members of the firm who have experience in auditing energy and public companies. Partner review of key accounts will be extensive.

Based on the information provided in the case study, create a chart that identifies the following:

-Minimum of ten risk factors
-Effect on the risk of material misstatement. Does the factor increase or decrease the risk?
-Audit risk model component. Identify the component of the model that applies to the factor selected. You will use one of the following:
-Inherent risk
-Acceptable audit risk
-Control risk
-Planned detection risk
Use this format for your chart.

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