Acca aaa s21 Notes

September 2021 to June 2022 exams
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However, an effective system of internal control can help to prevent or detect and correct errors. For 
example:
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Senior management of experts review assumptions and other sources of estimation uncertainty. 
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Segregation of duties or independent checks reduce the risk of errors and fraud.
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Reconciliations check the completeness and accuracy of numerical data.
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Authorisation and approval lends reliability to transactions.
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Physical measures safeguard assets.
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Inspection of assets can detect damaged assets or deliveries not properly made. 
Don’t look upon the audit risk model too mathematically. What it is saying is that auditors will want 
the audit risk to be low: they don’t want to make an error in their audit opinion. 
If they want the audit risk to be low then the terms on the right hand side of the equation, or at least 
some of them, have to be low.
If an error is made in the first place (inherent risk) AND is not identified and corrected by the controls 
(control risk) then the error will be incorporated into the draft financial statements. There is then only 
one line of defence to prevent the error from being included in the published financial statements: 
the audit.
The error 
has to 
occurred
The material 
error reaches 
the published 
financial 
statements
Audit risk
The client’s procedures 
and staff must not have 
picked that up and 
corrected it
The auditor must have 
failed to detect it
If the auditors believe that the inherent risks together with the control risks are unacceptably high, 
then they must increase the amount of audit work they perform. This reduces the detection risk (the 
risk that the error is not discovered by the auditors). Risks of undetected material misstatements must 
be reduced to levels which provide reasonable assurance that material errors are detected.
Neither inherent risk nor control risk can be influenced by auditors in the short term. Inherent risk 
might be completely impervious to change (for example, a complicated transaction will always be 
complicated). Control risks might be reduced in the medium term if the audit client takes note of 
auditors’ letters which set out control weaknesses. However, when it comes time to perform the audit 
on the draft financial statements, the only risk that the auditors can control is the detection risk. They 
must do sufficient audit work to manage the overall audit risk.