M2A1 Audit Risk Discussion

Peer 1

DavisK_M2_A1

Kanardo Davis posted May 19, 2018 11:45 AM

An audit risk model are the contributing factors multiplied by each other including inherent risk, control risk, and detection risk. Inherent risks include material misstatements or including or excluding financial transactions due to the nature of the transacted property other than controlling error which leads to a general higher value than the other two risks involved. Control risks include techniques used to minimize error and fraud. This may include not having a knowledgeable staff. Detection risks involved the auditors' failure to identify error within financial statements (Audit Risk Model, Accounting-Simplified.com). The audit risk model is important because if inappropriate opinion is expressed things could happen where: unqualified reports are issued where needed qualification, qualification reports issued where none is needed, significant matters may be overlooked and insignificant opinion may be issued where inexperience signifies the audits irrelevance.  

Audit Risk Model Inherent Risk, Control Risk & Detection Risk. (n.d.). Retrieved May 19, 2018, from http://accounting-simplified.com/audit/risk-assessment/audit-risk.html

Peer 2

M2:A1 Discussion-Audit Risk

Veronica Tarleton posted May 17, 2018 7:39 PM

Aloha Professor McAbee and Classmates,

Dewey, Wright, and Moore will evaluate AV Imports and Exports financial statements for effectiveness of their internal control.  An audit risk model will be used to maintain AV Imports and Exports objectives.  Dewey, Wright and Moore are able to obtain reliable financial reports on AV Imports and Exports operations.  Such system can prevent fraud or misappropriation of AV Imports and Exports assets, and it helps with minimizing their cost of capital. 

The audit risk model will help Dewey, Wright, and Moore make decisions.  An inappropriate audit opinion may be a result of AV Imports and Exports financial statement and how their materials are misstated.  It can determine which controls to trust and inspect.  An assessment of each component can impact the overall audit risk on the engagement.  If risks are high, audits can be poorly planned or performed.  There are “no official standard for an acceptable level of overall audit risk except that it should be appropriately low” (Louwers, Ramsay, Sinason, Strawser, &Thibodeau , 01/2014).  Financial statements will be evaluated as a whole if there are relevancy to a significant account or disclosure.  No matter if these accounts have an effect on control, they still can contain misstatement materials. 

Audit risk is broken down into other risks such as inherent, control, and detection.  An inherent risk is when a company does not have an internal control system.  Materials are acceptable for errors and fraud can be committed when and accounting system is used to develop financial statements.  The reason this may occur, is that AV Imports and Exports perform these functions based on the types of transaction they do, and the effectiveness and integrity of managers and accountants.  Inherent risk are not created or controlled by Dewey, Wright, Moore, they can only assess.  A control risk can fail if Dewey, Wright, and Moore prevents or detects a material misstatement.  They will have to make appropriate processing and recording transactions that helps in producing a reliable financial statement.  In other words, Dewey, Wright, and Moore will not create a manage control risk. They operate by evaluating the “control system to assess a probability of failure from preventing or detecting a material misstatement” (Louwers, Ramsay, Sinason, Strawser, &Thibodeau , 01/2014). A detection risk is if Dewey, Wright, and Moore presents their own procedures.  However, they can fail if it detects a material misstatement.  The only way it will notice is if it was entered into the accounting system, especially if it was not corrected. 

There is importance of an audit risk concept.  One being is the economic importance.  It is very important that AV Imports and Exports stay with the regulations set by the Sarbanes-Oxley act, including what legislation in act.  It should be important enough because of its flexibility and broadness.  Dewey, Wright, and Moore can “incorporate standards and make strong audits that both businesses and investors can count on” (Lacoma, n.d.).  When there is a complex audit, the audit risk concept could be important for adaptability.  How? by allowing Dewey, Wright, and Moore to assess current situation making it flexible to inspect errors” (Lacoma, n.d.).  It can also be important if there are factors such as Dewey, Wright, and Moore having the experience if there are similarity with other businesses, that they can find common areas of faults and weaknesses.   

However, I read an article on the importance of a Safety Audit on cities in India.  It is an hypotheses study with two components, universal and women safety were just the background to start.  Their main objectives consist of studying the safety and accessibility of the cities and factors that is comprehensive for the design of a safer city.  They measured it with the safety of women in public areas, women who are familiar with the areas, structure, and the type of women groups.  They used a women’s safety handbook as resource for low-income areas.  Although this may sound like a survey, they reviewed literatures to identify parameters, and did a checklist. As they gathered material information for inclusive urban spaces, and women in cities internationally, it was important to use a Women’s Safety audit.  “The study revealed that 90% of the safety audit parameters are seen to cover accessibility issues” (Mitra & Bardhan, 2017).

References:

Lacoma, Tyler. (n.d.). The Importance of an Audit Risk Model. Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/importance-audit-risk-model-22294.html

 

Louwers, T., Ramsay, R., Sinason, D., Strawser, J., Thibodeau, J. (01/2014).  Auditing & Assurance Services, 6th Edition. [Argosy University]. Retrieved from  https://digitalbookshelf.argosy.edu/#/books/1259562875/

 

Mitra, P., & Bardhan, S. (2017). Tracing the Importance of Safety Audit in Making Inclusive Cities: A Step Towards Smart Cities. Procedia Environmental Sciences, 37, 4