Audit risks emanate from management

Audit Risk 1
AUDIT RISK
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Audit Risk 2
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,