Can you identify Significant Risks for an audit client?

Summary

In this educational video, Dr. Amanda White clarifies the confusion between business risks, inherent risks, control risks, and the risk of material misstatement, which often leads to lost marks in exams. She explains the concept of significant risks, as defined by ISA 315, and provides three practical tips to help identify them. These tips include understanding the client's industry and operations, distinguishing between business and inherent risks, and linking risks to potential misstatements. The video aims to help students excel in their auditing assessments and exams.

Takeaways

• 📚 Dr. Amanda White discusses the confusion students face between business risks, inherent risks, control risks, and the risk of material misstatement.
• 🔍 The video aims to untangle these concepts and provide tips for identifying significant risks, which are crucial for planning and executing audits.
• 📈 Significant risks are defined as the risk of material misstatement or error that could affect the audit process, originating from ISA 315.
• 🌐 Inherent risks are linked to the nature of the client's operations, such as trading in foreign currencies or having complex bonus schemes.
• 🛠 Control risks arise when internal controls are missing or not functioning properly, increasing the chance of misstatement or error.
• 📝 The new ASA 315, effective in 2021, instructs auditors to identify risks of material misstatement and evaluate their potential impact and likelihood.
• 🧠 Tip 1: Understanding the client is key to identifying inherent risks; this includes knowledge of their industry, operations, corporate governance, and global economic context.
• 🚫 Tip 2: Business risks are not always inherent risks; they may not necessarily lead to increased accounting errors or misstatements.
• 🔗 Tip 3: Ensure risks can be linked to an account or assertion; if not, they may not be significant risks.
• 💡 The ability to identify significant risks is foundational to auditing, as failure to do so could lead to undetected material misstatements and incorrect audit opinions.

Q & A

What is the main topic discussed in Dr. Amanda White's video?

The main topic discussed is the concept of significant risks in auditing, particularly the confusion between business risks, inherent risks, control risks, and the risk of material misstatement.

What are the two main sources of risk of misstatement or error in financial statements according to the video?

The two main sources are inherent risks and control risks. Inherent risks are due to the nature of the business or industry, while control risks are due to the absence or ineffectiveness of internal controls.

What does the term 'inherent risk' mean in the context of auditing?

Inherent risk refers to the risk of misstatement or error that exists due to the nature of the client's business or industry, which is a permanent or characteristic attribute of the client.

How does the new AS 31:5 standard mentioned in the video help in identifying significant risks?

The new AS 31:5 standard instructs auditors to identify risks of material misstatement and then consider their broad financial statement impact and evaluate the nature and extent of their effect, helping to distinguish significant risks.

What are Dr. Amanda White's three tips for identifying significant risks?

Tip one is to know the client well, including their industry, operations, corporate governance, and global economic environment. Tip two is to distinguish between business risks and inherent risks. Tip three is to ensure the risk can be linked to an account or assertion to increase the risk of misstatement or error.

Why is it important to differentiate between business risks and inherent risks?

Differentiating between business risks and inherent risks is important because not all business risks result in an increase in the risk of misstatement or error in accounting, and this distinction helps in accurately identifying significant risks.

What is the significance of understanding the client's industry in identifying inherent risks?

Understanding the client's industry helps in identifying where potential mistakes or errors in accounting might occur, as certain industries may have unique or complex accounting policies that increase inherent risk.

How does the global economic environment factor into the identification of inherent risks?

The global economic environment can introduce risks such as trade tensions, disruptions due to technological advancements, or difficulties in refinancing debts, which can affect a client's operations and thus increase inherent risks.

What is the consequence of not properly identifying significant risks during an audit?

Failing to properly identify significant risks can lead to missing a material misstatement, providing an incorrect audit opinion, and potentially facing legal consequences such as lawsuits.

What is the call to action at the end of the video for viewers to engage with the content?

The call to action is for viewers to select one of the companies - Apple, Airbnb, or Innisfree - and identify three significant risks they believe the company faces, then share their risks and explanations in the comments section.