Page 14 - Auditinf Electronic System

2) Step 2: Understand Internal Control and Assess Control risk

The auditor should assess control risk by identifying internal controls and
evaluating their effectiveness. Through, assessing the ability of the client’s internal
controls to generate reliable financial information and safeguard assets and records

If internal Controls are effective, planned assessed control risk can be reduced
and the amount of audit evidence to be accumulated can be significantly less than
when internal controls are not adequate.

3) Step 3: Assess risk of Material Misstatement (RMM)

The auditor uses the understanding of the client’s industry and business
strategies, as well as the effectiveness of controls, to assess the risk of misstatements
in the financial statements. This assessment will then impact the audit plan and the
nature, timing, and extent of audit procedures.

Ex: if the client is expanding sales by taking on new customers with poor
credit ratings, the auditor will assess a higher risk of misstatement for net realizable
value of accounts receivable and plan to expand testing in this area.

What is the Audit risk Model?

The auditor determines the scope, extent and timing of Substantive tests
depending on level of audit risk assessed.

Audit Risk

A- Definition:
❖ Audit risk is the probability that the auditor will issue an unqualified (clean)

opinion on financial statements that are, in fact, materially misstated whether
due to:

A. Errors: unintentional mistakes.
B. Fraud: intentional mistakes
The auditor’s objective is to achieve a level of audit risk that is acceptable to the
auditor. Acceptable audit risk (AR) is estimated based on the value of the
components of the audit risk model.

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‫جميع الحقوق محفوظة ـ الإعتداء على حق المؤلف بالنسخ أو الطباعة يعرض فاعله للمسائلة القانونية‬