Audit risks emanate from management

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AUDIT RISK
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Audit Risk
Audit risk occur when financial statements are materially incorrect, though the audit
opinion states that they are free of errors (Griffitths, 2016). Audit risks emanate from
management, industry, entity, and auditors. Auditors thus assess risk through inquiry, inspection,
and observation. There are three types of audit risk: detection, inherent, and control risks. The
task involves audit partner, Pearce Green, and the client, South Limited. The paper will discuss
factors that affect the risk of material misstatement and also provide appropriate
recommendations.
Control risks occur due to ineffectiveness of internal control to detect and protect
material misstatements. Internal controls refer to the organization's procedures to safeguard
assets, promote accountability, and increase efficiency (Mayes, 2016). Internal controls entail
segregation of duties, authorization of transactions, and reconciliation of financial statements.
Weak internal controls both hinder the auditor from detecting material misstatements and also
increase the chances of making errors on financial statements. Therefore, auditors have the
mandate to assess the reliability of the organization’s internal controls that link financial
reporting. Homes south Limited, can control risk by establishing strong internal controls. For
example, the Company should segregate duties, perform weekly trial balance, perform physical
audits, authorize transactions, and also reconcile income statements with accounting systems.
Additionally, Pearce Green should conduct risk assessments at the planning stage to identify and
understand the client's internal controls.
Inherent risks are risks that cannot be mitigated by internal controls because of the
complexity of the business. Inherent risks also originate from a change in climate and politics
(Gonzalez, 2018). Competent auditors are supposed to identify and assess inherent risks. Thus,

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Pearce Green should design an appropriate audit procedure that contains a plan, approach and
strategy to identify and rectify inherent risks. Auditors should also deeply understand the
business and its transactions, to identify inherent risks. Auditors should also allocate sufficient
time to perform the audit procedure appropriately.
Detection risks occur because of the inability of the auditor to detect errors and fraud and
then proceeds to give an incorrect opinion (Hilorne, 2019). The risk occurs because auditors use
the wrong method, inappropriate audit plan. Auditors might also be incompetent and lack
understanding of the audit procedures. A poor audit plan fails to detect audit risk that affects
financial statements. Pearce Green should design an appropriate audit plan, strategy, and
procedure, to identify errors in financial statements. Auditors should also be competent to
identify all types of audit risks.
In a nutshell, audit risk occurs when auditors give an inappropriate opinion regarding
financial statements. Control risks occur when internal controls fail to detect and protect material
misstatements. Companies can control risks by establishing strong internal controls. Detection
risks arise because of the inability of the auditor to detects errors and fraud and then proceeds to
give an incorrect opinion. Auditors should design an appropriate audit plan, strategy, and
procedure, to identify material misstatement in the financial statements. Auditors should assess
risk through inquiry, inspection, and observation.

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References
González, H., 2018, November. ESIA Expert System for Systems Audit Risk-Based.
In Advances in Artificial Intelligence-IBERAMIA 2018: 16th Ibero-American Conference
on AI, Trujillo, Peru, November 13-16, 2018, Proceedings (Vol. 11238, p. 483). Springer.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Hilorme, T., Zamazii, O., Judina, O., Korolenko, R. and Melnikova, Y., 2019. Formation of risk
mitigating strategies for the implementation of projects of energy saving
technologies. Academy of Strategic Management Journal.
Mayes Jr, C.R., Landes, C.E. and Hasty, H., 2018. Taking the Risk out of Risk Assessment:
Properly Considering a Client's Risks Is Essential to a Quality Audit. Journal of
Accountancy, 226(2), p.38.