Risk assessment - part 3

In this lesson

1. 0:00 Advanced Audit and Assurance: Planning and Risk Assessment
2. 0:29 Understanding Material Misstatement Risks in Financial Statements
3. 2:47 Identifying Overstatement and Understatement Risks
4. 5:10 Detection Risk: Sampling and Non-Sampling Risk
5. 7:09 Ranking Risks by Materiality and Significance
6. 10:00 Risk Assessment Procedures: Inquiry, Analysis, Observation
7. 12:00 Responding to Identified Risks with Targeted Testing
8. 14:45 Linking Financial Statement Risks to Audit Procedures

About this lesson

Building on inherent and control risk, you'll work through a practical scenario involving a luxury resort chain to see how business events translate into specific audit risks. You'll discover how to think systematically about financial statement impact (asking "so what?"), distinguish between overstatement and understatement, and recognise when risks are significant enough to warrant detailed audit procedures. The lesson covers three key types of risk. Inherent risk and control risk set the foundation, but detection risk—the risk that your audit procedures fail to catch a material misstatement—depends entirely on you as the auditor. You'll explore sampling risk (the chance your sample misses material errors) and non-sampling risk (incorrect conclusions for other reasons), then learn how to rank risks by likelihood and significance using factors like industry complexity, accounting policy changes, and areas involving subjective judgment like provisions. Finally, you'll see how to move from identifying risks to designing responses. The lesson demonstrates practical procedures: inquiring of management and internal audit, performing analytical procedures to spot variances, observing controls in action, and inspecting key documents like board minutes. You'll work through worked examples—such as distinguishing research from development expenditure, or correctly accounting for share premiums and loan finance costs—to understand how identifying the financial statement effect helps you design targeted, efficient audit procedures. The principle is straightforward: higher risk areas demand more audit work to keep overall audit risk acceptably low.

Duration: 17m