1) The risk that the relevant assertions related to classes of transactions, account balances, or disclosures contain misstatements that could b ematerial, either individually or when aggregated with other misstatements, to the financial statements (inherent risk and control risk).

2) The risk that the auditor will not detect such misstatements (detection risk)

an unqualified report can be issued

the auditor should either conduct additional audit work or qualify the audit report 

1) Seting a planned level of audit risk

2) Assessing the risk of material misstatement

3) Solving the audit risk equation for the appropriate level of detection risk

1) Assess the entity's business risks 

2) Relate those risks to what can go wrong at the class of transactoin, account balance, or disclosure levels

3) assess the risk of material mistatement 

low

very low 

low 

moderate

high 

1) Inquiries of management etc.

2) analytical procedures

3) observation

4) inspection 

1) Those charged with governance

2) Internal audit personell

3) Employees involved in initiating authorizing, processing, or recording complex or unusual transactions

4) In-house legal counsel

5) Production, marketing, sales, and other personnel

1) Customers

2) Suppliers

3) Valuation specialists

to assist the auditor in understanding the netity and its environment and in identifying areas that may represent specific risks relevant to the audit.

Can help in identifying the existence of unusual transactions or events and amounts, ratios, and trends that might have implications for audit planning.

1) Observation of entity activities and operations

2) Inspection of documents (e.g., business plans and strategies), records, and internal control manuals.

3) Reading reports prepared by management, those charged with governance, and internal audit.

4) Visits to the entity's premises nd plant facilities.

5) Tracing transactions trough the information system relevant to financial reporting ,which may be performed as part of a walkthrough.

6) Reading about industry developments and trends, the current year's interem financial statements, and regulatory or financial publications.

Nature of the entity

Industry, regulatory, and external factors

Objectives, strategies, and related business risks

Entity performance measures

Internal control

Significant changes in the entity industry, products, or IT environment

New locations

Operations in areas with unstable economies

High degree of complex regulation

Organizational structure and management personnel 

Sources of funding the entity's operations and investment activities 

The entity's investments 

The entity's operating chaacteristics, including its size and complexity

The sources of the entity's earnings 

Key supplier and customer relationships 

Reading public information about the company relevant to the evaluation of the likelihood of material misstatement and the effectiveness of internal controls

Observing or reading transcripts of earnings calls conducted by management 

Obtaining information about significant unusual developments regarding trading activity in te company's securities

Obtaining an understanding of compensation arrangements with senior management

1) Misstatements arising from fraudulent reporting

2) Misstatements arising from misappropriation of assets

Known

Likely

Arise from differences between the auditors judgements concerning accounting estimates and managements estimates that the auditor considers unreasonable or inappropriate

The auditor considers likely to exist based on a projection of misstatements identified in an audit sample 

1) Discussion among the audit team members regarding the risks of material misstatement due to fraud

2) Inquire of management and others about heir views on te risks of fraud and how it is addressed 

3) Consider any unusual or unexpected relatinships that have been identified in performing analytical procedures in planning the audit 

4) Understand the client's period-endclosing process and investigate unexpected period-end adjustments 

Share insights about the entity, it's environment, and business risks

Provide an opportunity for the team members to discuss how and where the entity ight be susceptible to fraud 

Emphasize the importance of maintaining professional skepticism throughout the audit regarding the potential for material misstatement due to fraud 

1) knowlede of fraud within the entity

2) the programs and controls that management has established to mitigate specific risk factors and how well management monitors those programs and controls

1) Management or other employees have an incentive or are under pressure that provides a reason to commit fraud

2) Circumstances exist that provide an opportunity for a fraud to be carried out 

3) Those involved are able to rationalize committing a fraudlent act. Some individuals possess an attitude, character, or set of ethical values tha tallow them to knowingly and intentially commit a dishonest act. 

incentive

opportunity 

rationalization/attitude

1) the nature of the industry/operations

2) ineffective monitoring 

3) complex/unstable organizational structure

4) Internal control deficiencies 

1) ineffective implementation of values/ethical standards

2) nonfinancial management participation in selecting accounting principles or significant estimates

3) entity history of violations 

4) escessive interest in maintaining or increasing stock price or earnings trend

5) commitment to unrealistic forecasts

6) Recurring attempts to justify marginal or inappropriate accounting 

1) Emphasizing to the audit team the need to maintan professional skepticism in gathering and evaluating audit evidence 

2) Assigngin more experienced staff or those with specialized skills or using specialists

3) providing more supervision

4) incorporating additional elements of unpredictability in the selection of audit procedures to be performed

assertions identified with fraud risk factors

nonroutine or unsystematically processed transactions

signficant accounting estimates and judgements 

highly complex transactions

application of new accounting standards

revenue recognition in certain industries or for certain types of transactions 

industry specific issues 

Attempt to obtain evidence to determine materiality of the fraud

Consider the implications on other aspects of the audit

Discuss the matter with a level of management at least one level above the involved with the fraud and with senior management 

If appropriate, suggest that the client consult wit hlegal counsel

risk assessment procedures and audit responses to identified risks

nature and results of communication among engagment personnel that occurred in planning the audit regarding the RMM

stteps performed in obtaining knowledge about the entity's business including: 

the risks identified

an evaluation of management's response

assessment of the risk of error or fraud after considering the response

the nature, timing, and extent of the procedures performed in response to the RMM caused by fraud and te results of tat work

fraud risks that caused the auditor to believe that additional work was required

the nature of the communications about error or fraud made to management, the audit committee, and others.

 to comply with legal and regulatory requirements

to a successor auditor when the successor makes inquiries of the predecessor auditor about the client

in response to a subpoena 

to a funding agency or other specified agency in accordance with requirements for the audits of entities that receive governmnetal financial assistance