Risk Assessment and Internal Control under AAS 6

In the auditing and assessment standard 6, auditor has to understand the meaning of audit risk, its type and the system of controlling the audit risk. Now, we are explaining all these things one by one.

Meaning of Audit Risk

Audit risk is the risk when auditor gives wrong opinion on the basis of wrong financial statements. It is very necessary that financial statements should free from material misstatements. If there is material misstatement, there may be inappropriate audit opinion. On this opinion, there may be big loss of interested parties of audited financial statements.

Types of Audit Risks

There are main three types of audit risks.

1. Inherent Risk

Inherent risk is the chance of future loss because there is not any internal control system or there is fault in internal control system. At that time, auditor may give wrong audit opinion. Inherent risk may happen on the basis of nature of business or transactions. For example, if there are millions of cash transactions in a day in any business, there is chance of fraud or mistake. So, inherent risk may happen.

2. Control Risk

Control risk is the audit risk which happens when fraud or error is not  deducted by internal control system. Whether is a good internal control system but cheater may take the benefit of small weakness of this internal control system. Due to this, control risk may happen.

3. Detection Risk 

Detection risk happens when auditor uses wrong or incorrect audit procedure. In above two risks happen due to the fraud or mistake or misstatement by company. But detection risk happens due to mistake of auditor and his auditing procedure.

Now total audit risk will be

Audit Risk = Inherent Risk X Control Risk X Detection Risk

How to Control Audit Risk

When a new audit take the case for auditing of such company in which there is inherent risk, control risk and detection risk. Auditor will assess all the risk. Assess means, he will evaluate the level of all these risks. Risk may be at low level, middle level and high level. Auditor is just like a doctor. When he see temperature is just 100 degree F, he will give small medicine. If he sees that temperature is 104 degree, he will give high medicine. Like this, auditor will start the process of controlling auditing risk only after seeing the level of audit risks.

1. Control the Inherent Risk 

For controlling inherent risk, auditor will get every evidence of each transaction. Instead of using sample, he will check each transaction's whole record. He will also follow all methods for collecting audit evidence.

2. Control the Control Risk 

When he see the weakness in the internal control. He will start to check who is doing what duty. If there is lack of segregation of duties in any division of accounting department. He will double check its account and tries to best who is responsible for fraud. His first preference to safeguard of assets. He will also suggest for strengthening the internal control system. He may check again all the documents which are checked under internal control system.

3. Control the Detection Risk 

For controlling detection risk, he will improve his audit procedure. If there is lack of data for proper audit, auditor should find missing data and then next step of audit should go. For better control, auditor must take the interview of all the officers of accounting department. Instead of making large audit report, make small but it should have clearly point for protection the interest of investors.

Related : AAS 5


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Accounting Education: Risk Assessment and Internal Control under AAS 6
Risk Assessment and Internal Control under AAS 6
Accounting Education
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