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Audit Risk

26 Pages | 5,331 Words
Carol Sargent, PhD (#107956)

This book provides instruction about inherent risk, control risk, and detection risk. The discussion examines each ingredient individually, with theory and a bullet list of examples, before combining to see how the audit model elements interact with each other. Next, you will see how the financial statement auditor assesses inherent and control risks and then sets the detection risk. You will also learn how to solve for detection risk algebraically when the auditor assesses risk as a percent.

Next, you will learn how to adjust the audit risk model once the audit is underway and the assessed risks change as the result of audit evidence gathered. In this way, you being to see how audit events cause changes to the initial assessment and therefore changes to the amount and type of audit evidence gathered to keep overall audit risk at the desired level.

Finally, the book provides you with a comprehension check with difficult and tricky exam questions to show how to address jargon-laden professional questions on this topic. These are similar to CPA EXAM questions that many students hope to master for their professional credential.

Everything You Need to Know About Audit Risk does not get bogged down in heavy terms or insist that side topics are mastered before teaching you about audit risk. This is a “stand alone” discussion of audit risk. Therefore, you do not have to know a great deal of auditing to be able to read and master this topic.

This book is ideal for accounting majors, anyone preparing for the CPA Exam, those interested in the audit profession, or entry-level auditors needing to brush up on their key concepts.  

An Introduction to Audit Risk

Controlling audit risk is a central goal of an audit because failing to do so means the auditor issues a wrong report. So, getting this right is critical for auditors.

Audit risk is the risk that the audit report will be wrong. That is, that the auditor issues a “clean” or unqualified report when the financial reports contain material (large and important) misstatements (errors or misleading aspects). Alternatively, that the audit issues a qualified or adverse (bad report card) when the financial statements are just fine.

Auditors cannot get audit risk to zero because they do not review every transaction to be positively sure. However, auditors want the audit risk, the risk of issuing the wrong report, to be very low!

This book will explain how the auditor can review the client’s business and controls and adjust the level of audit evidence gathered to maintain the audit risk at a low level. The work does not assume the reader has a prior knowledge and so the technical jargon is kept to a minimum. That is, until the last section, where you are introduced to CPA EXAM level questions, technical jargon is minimized. After you understand the concepts, introducing the jargon adds a level of difficulty that is more reasonable.

Auditing is often difficult for the novice because it do not contain procedures or computations typical in other financial accounting courses. Auditing requires the mastery of a completely new vocabulary! For example, here are two quotes in the first paragraphs on audit risk from the auditing standards:

“Audit risk and materiality, among other matters, need to be considered together in designing the nature, timing, and extent of audit procedures and in evaluating the results of those procedures.” (AU Section 312.01)

“Audit risk is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.” (AU Section 312.02)

Most students have no idea what either of these two things mean and so they either get frustrated or memorize, neither of which really helps advance expertise. This e-book breaks it down the topic with tables and examples so that you follow the discussion.

Yes, it is difficult to be a novice in the field of auditing because many of the answers in the field are “it depends” and “it requires judgment.” Well, relax. It is possible to learn this material without losing all your hair. This book introduces technical terms slowly and provides clear examples that make sense to you. The goal is to build your vocabulary and comprehension so that when the more complex and jargon-laden questions come, you have a foundation to approach them effectively.

About the Author

Carol Sargent, PhD

Active since Oct 2010

CPA turned "Learning Scientist!" Carol Sargent is a dual-qualified expert as a retired auditor and financial manager who went back to academia and got her Ph.D. She still has an active CPA license but also specializes in how to convey complex ideas and procedures to students simply and with a bit of enjoyment. She has awards in innovation, instruction, and research and brings all that expertise to coaching you through your learning obstacles. She prides herself in having a vast toolbox of different ways to explain anything. If one way doesn't work, she'll find another. Her teaching is rich with practical examples, grounded in sound educational theory, and expressed in everyday language suitable for the novice. Need to ask someone who has "been there?" Dr. Sargent has 15 years of teaching and 17 years of field experience. Coaching you is the best part of her day. So, please ask!

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