Appendix4-Types of audit risks
Audit risk
Factor/ldentify
Lack of physical Employeesaremore
Workwe need to Type of risk
perform/effect on
the audit
Physical checks ofthe
controls
Valuable
assets not
being locked
away.
No restricted
access to
sensitive
likely to steal assets from assets required to
the company or notlook determinecompleteness
afterthem;thereforethey and value.
get damaged and
become impaired. Analytical review to see
any unusual trends over
Incorrectstatementon excess ordering etc.....
Financial statements the
asset position potentially
areas.
No security
over statement.
measuresfor
access to
premises.
Lack of IT based Computersystems can
controls be changed or modified
withoutsuitable
No passwords or authorisation.
lack of password
protection Changes are not
(everyone knows recorded and or notified
nalytical procedures to
be performed to see if
any unusual trends are
happening.
Review the integrityof
the staff.
each others
passwords).
Lack of
authorisation
controls.
Lack of
segregation of
duties.
to responsible
individuals. ssess the systems to
see how easy changes
will go undetected.
Unnecessary expenditure ssess the systems to
incurred or even non determinethe likelihood
business expenditure. of this happening.
Sales completedover the Review the old balances
limitstherefore potential and credit limits and see
for non payment. hat other controls the
company have in place.
New staff employed
withoutauthorisation that Review the organisation
may not be necessary. chartfor reasonableness
and understand the roles
withinthe company.
Not identifyingerrors and Increase the substantive
fraud as only one person testing to ensure thatthe
doing thejob therefore statements are true and
concealment easier to fair.
perform.
ccount
balances for
example
Research and
Due to the natures of
these transactions a high
degree ofjudgement or
estimationis involved
development and and is thereforeopen to
arranty manipulationor error.
provisions.
Client operates Inventorymay be
in a high tech or obsolete
fashion industry
Obsolete inventorymay
be overstated in the
financial statements
Client is based in Inventoryheld at other
multiple
locations
Bank is relying
on the financial
statementsor
Directors are
paid a bonus
based on profits
Itis cash-based
locations may be omitted
from year-end inventory
Controls may be less
effective
Risk management bias
Cash may be
Get a understating of the
criteria that needs to met
and obtain sufficient
evidence to supportthe
calculations.
Review events afterthe
reportingperiod to
determinethe net
realisable value of
inventory
Use an independent
valuer to value inventory
Attend inventorytakes at
all locations
Review control
proceduresto ensure
they are adequate
Consider using a
substantive approach
Pay more attention
•accounting estimates
• cut-off
Obtain independent
estimates re valuation of
year-end inventoryetc
Consider the adequacy ofbusiness
The company
tradesoverseas
misappropriated,causing internalcontrols over
turnover to be
understated
Transactions in foreign
currency may not be
translated at the correct
rate
sales
(possible limitationin
scope ifwe cannot verify
the completeness of
sales and internal
controls are inadequate)
Ensure foreign currency
is correctly accounted for
The company may make
foreign exchange losses
Review procedures to
mitigateexchange loss
risk, e.g. hedging
New computer
system in the
year
Newaudit client
Tight audit
deadline
imposed by
client
Errors in transferring the
data from one system to
another
There may be inherent
errors in the new system
that have notyet been
discovered
Lack of cumulative audit
knowledge and
experience may lead to
increased detection risk
Review controls over the
changeover:
•parallel run
•check opening balances
transferred properly
Use test data on the
system to ensure it
operates correctly
Use an audit team that is
experienced in the
industry
Gather knowledge of the
company
Check openingbalances
are correct
Staff working quickly to a Increase substantive
tight deadline are more
likely to make errors
There is a shorter post
statement of financial
position period that we
can use to help with our
audit
testing
Perform an interim visit to
complete some audit
ork before the end of
theyear
Agree a timetable re:
•reporting deadline
•client schedules to be
available
Temporary staff Errors more likely as staff Increase substantive
used during the are notfamiliarwiththe
year at the
client's side
A client in a
specialised
industry
client's systems
Errors more likely or
fraud more likely to be
missed because ofthe
complexity of the work
testing
Ensure that the auditors
understand the system,
increase testing