Audit Risk – An Overview

• Concept of Audit Risk– Inverse of reasonable assurance– If 99% certainty is desired, the audit risk is 1%

• Professional Judgment and Audit Risk– Usually audit firm policy– Comparable from one audit to another

• Three conditions are generally present when fraud occurs.• Incentives/ pressures. Management or other employees have an

incentive or are under pressure, which provides a reason to commit fraud.

• Opportunity. Existing circumtances provide an opportunity for fraud to be perpetrated, such as the ability of management to override controls, the absence of controls, or ineffective controls.

• Rasionalization. Those involved in committing fraud are able to rationalize the fraudulent behavior. In other words, some individuals posses an attitude, character or set of ethichal values that allow them knowingly and intentionally commit a dishonest act.

• Risk factors associated with fraudulent financial reporting

• Incentive/ pressure• Economic, industry and operating conditions• Low barriers to entry, high degree of

competition combined with declining margins,• Vulnerability to technological change

Auditing for Fraud

Risk Assessment Procedures

Auditor should perform the following procedures to identify the risk of material misstatement due to fraud:• Make inquiries of management and others within the entity

to obtain their views about the risk of fraud and how it is addressed.

• Consider any unusual or unexpected relationships that have been identified in performing analytical procedures in audit planning.

• Consider other information obtained while planning the audit.

Brainstorming Session

The brainstorming session should:• Allow junior members of the audit team to benefit from more senior

members’ knowledge of the audit client and how fraud might be perpetrated.

• Allow more seassoned personnel a fresh set of eyes that might identify risks that otherwise might be overlooked.

• Allow audit management to set the appropriate tone for the audit and to emphasize the importance of approaching the audit with a “questioning mind”.

• Emphasize the possibility that fraud might exist in any audit.

Specific Risks• Auditors should approach the audit with a presumption that improper

revenue recognition is a fraud risk.• Auditors should perform certain procedures to address the risk management

override of controls. E.g. Auditors should examine journal entries and other adjustments for evidence of possible material misstatement due to fraud.

Dwi&Hanna

Model Risiko Audit

AR = IR x CR x DR

AR = IR x CR x AP x TD

Dimana: AR = risiko auditIR = risiko bawaanCR = risiko pengendalianAP = risiko prosedur analitisDR = risiko deteksiTD = risiko pengujian terinci

Risk components matrix

Assessing The Components of Audit Risk

• Inherent Risk, is the suscepbility of an assertion to material misstatement, assuming that there are no controls.

• Control Risk, is the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity’s internal controls.

• Detection Risk, is the risk that the auditor will not detected a material misstatement that exists in an assertion.

Interrelationships among materiality, detection risk, and substantive audit evidence

Components of preliminary audit strategies

• The assessed level of inherent risk.• The planned assessed level of control risk considering:

• The estent of understanding the internal controls to be obtained.

• Tests of controls to be performed in assessing control risk.• The planned assessed level of analytical procedures risk considering:

• The extent of the understanding of the business and industry to be obtained.

• Analytical procedures to be performed that provide evidence about the fair presentation of an assertion.

• The planned level of tests of details that, when combined with other procedures, reduces audit risk to an appropriately low level.