Acca aa s21 Notes

AUDIT RISK
1. Introduction
Audit risk is a technical term related to the process of auditing. The first thing to appreciate is that 
audit risk cannot be reduced to zero as an audit cannot provide absolute assurance – only reasonable 
assurance. This is because an audit has ‘inherent limitations’, for example:
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Part of the nature of financial reporting is that financial statements should include accounting 
estimates which necessarily involve judgement.
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Audit procedures are designed to gather audit evidence, not to detect intentional misstatement 
that has been deliberately concealed.
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As an audit needs to be conducted within a reasonable period of time and at a reasonable cost, 
it is not possible to examine everything exhaustively.
Audit risk is considered throughout the audit, in particular:
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In understanding the entity – what are the risks? (ISA 315 
Identifying and Assessing the Risks of 
Material Misstatement
).
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In planning the audit – how are risks to be reduced to an acceptably low level? (ISA 330 
The 
Auditor’s Responses to Assessed Risks
).
A ‘planning’ question in Section B of the AA exam will typically include the requirement “Describe [a 
specified number] 
audit risks
and explain the 
auditor’s response
to each risk in planning the audit 
of [Client Co]”. This Chapter explains the components of audit risk and introduces how the auditor 
responds to risk.
September 2021 to June 2022 exams
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2. Audit risk
Audit risk is the risk that the auditor gives an inappropriate opinion on the financial statements (ie the 
audit opinion is that the financial statements present fairly, in all material respects, when, in fact, they 
contain a material misstatement).
Audit risk is a function of two risks:
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The risk that the draft financial statements actually contain a material misstatement. This is the