FRA Assurance audit risks

Inherent risk

Susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Risk exists before considering internal controls

Control risk

the risk that a misstatement which could occur in an assertion about a class of transaction, account balance or disclosure and which could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

Risk that internal controls fail to prevent or detect misstatements

Detection risk

the risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement which exists and which could be material,
either individually or when aggregated with other misstatements.

Detection risk is affected by
sampling and non-sampling risk.

AUDIT RISK

Inventories could be under/overstated

Non-current assets (NCA) could be overstated

Trade receivables could be overstated

Revenue could be overstated

Profit could be overstated

Expenses could be understated

Liabilities could be understated

An increased risk of material misstatement

Financial statements could be prepared on an incorrect basis

Inventories could be under/overstated

Inventories should be valued at the lower of cost and net realisable value (NRV)

Non-current assets (NCA) could be overstated

Trade receivables could be overstated

Consider whether debts are recoverable or whether a bad debt should be recognised

Revenue could be overstated

Consider whether all sales returns have been recorded, or whether there is an incentive to improve the revenue figure.

Profit could be overstated

This could link to revenue being overstated, incentives to improve the overall performance of a business or links to costs being capitalised incorrectly.

Expenses could be understated

This could be linked to costs being capitalised incorrectly, or perhaps where potential penalties or interest haven’t been recorded.

Liabilities could be understated

Consider whether there could be any instances whereby the organisation might need to pay out monies and whether it needs to be recognised, for example legals claims or unpaid tax etc.

An increased risk of material misstatement

Consider using this if there is just a higher risk of error, for example any issues with internal controls, a business risk due to a poor trading year, or a change in key personal or a system

Financial statements could be prepared on an incorrect basis

This is where there is a going concern issue. Consider whether there is a reason why the company may struggle to continue trading, for example reputational damage or cash flow issues which could be linked to higher trade payable days. Remember suppliers can apply a winding up notice when an organisation is not paying it’s debts, this could force the company into compulsory liquidation.