Acca aa s21 Notes

Inherent risk 
 
is the risk that there is a misstatement that could be material, if there 
were no related internal controls which could identify and trap that 
misstatement. Inherent risks can be increased by complex transactions 
which are difficult to understand, inexperience staff, a cash-based 
business (because cash is usually more difficult to record that bank 
transfers), a pressure to perform (which may mean that some staff 
members who have optimistic view of sales and costs), and short 
reporting deadlines.
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Control risk
 
is the risk that the material misstatement, having occurred, will not be 
prevented or detected and corrected by the system of internal control. 
The main factors which affect control risk are the control environment 
(i.e. the foundation for the other components of the system of internal 
control), the design of the system of internal control itself, and finally how 
well and consistently the system of internal control operates. This is 
covered later in Chapter 12.
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Detection risk
is the failure of the auditor to detect the material misstatement in the 
financial statements. This will be increased if the auditor was relatively 
inexperienced, if it was a new client, if there was a lot of time and fee 
pressure, if planning was poor so the entity was poorly understood, and if 
the auditor was straying into an industry where they had little previous 
experience or expertise.
September 2021 to June 2022 exams
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