Acca aaa s21 Notes

September 2021 to June 2022 exams
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3. Audit risk
Audit risk is the risk that the financial statements contain a material misstatement that the auditors 
have not discovered so that the auditors give an inappropriate opinion on the published financial 
statements. (Strictly, it could also refer to the auditors modifying their opinion when the financial 
statements are fine. However, this is 'scoped out' of the ISAs as this risk is ordinarily insignificant.)
Audit risk has three components whose relationship is described by the audit risk model:
Risk of material misstatement
Audit Risk
Control Risk
Inherent Risk
Detection Risk
Sampling Risk
Non-sampling Risk
AR
=
IR x CR
x
DR
๏
Inherent risk
= the risk of an error occurring in the first place, without any controls being 
present.
๏
Control risk 
= the risk that the entity’s control procedures do not prevent, detect and correct 
the error.
๏
Detection risk 
= the risk that audit procedures do not discover the error.
The assessment of inherent risk considers both 
likelihood
and 
magnitude
of possible misstatement.
A significant risk may arise from matters such as:
๏
Transactions that involve subjectivity (e.g. because there are acceptable alternative accounting 
treatments); 
๏
Accounting estimates with high estimation uncertainty or using complex models; 
๏
Account balances or quantitative disclosures that involve complex calculations; 
๏
Changes in the entity’s business that involve changes in accounting (e.g. acquisitions or change 
in business model). 
If there are no controls any errors will find their way into the draft financial statements.