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Chapter 7 - Assessing Risks and Internal Control.docx

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University of Guelph
ACCT 3280

Chapter 7 Assessing Risks and Internal ControlAudit Risk Assessment Audit risk is related to the info risk that audited financial statements that are materially misstated will go out to users Audit risk is associated with gathering evidence on the facts of the auditees economic realtyit is created by having less than all the possible corroborating audit evidenceCompilation engagements provide no assurance bc the evidence risk associated with having no corroborating evidence is 100Business risk and internal control are inseparable concepts that exist within an auditee organizationTo develop the audit work programs auditors need to assess risk specifically in audit related terms inherent risk control risk and detection riskInherent RiskInherent riskthe probability that material misstatements have occurred in transactions within the accounting system used to develop financial statementsor that material misstatements have occurred in an account balanceInherent risk is the risk of material misstatements occurring in the first placeIt is a characteristic of the auditors business the major types of transactions and the effectiveness of its accountants so understanding the auditees business risk is important for assessing inherent risks Revenue accounting can have high inherent risk Business often use info from many sources and compile revenue numbers in spreadsheets rather than by an automated system which increases the inherent risk of material errors and inaccuracies The inherent risks determine the importance of various procedures for different accounts Control RiskControl Riskthe probability that the auditees internal control policies and procedures will fail to detect or prevent material misstatementsAuditors can only evaluate an organizations control system and assess the probability of material misstatements Auditors are mainly concerned with internal control relevant to the auditthose policies and procedures established and maintained by management that affect control risk relating to specific financial statement assertions at the account balance or class transactions levelAuditors use the risk management frameworks for assessing risks at the company level as well as for auditing controls over financial reporting
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