Objectives, Control Risk, Inherent Risk, and Detection Risk in Auditing

This document provides a comprehensive analysis of the objectives of auditing, review of control risk, review of inherent risk, and review of detection risk. It explains the importance of auditing in verifying the integrity of accounting records and detecting errors and frauds. The document also discusses the role of control risk, inherent risk, and detection risk in the auditing process.

Audit

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Objectives of Auditing:...............................................................................................................3
Review of control risk: ..............................................................................................................4
Review of inherent risk:..............................................................................................................6
Review of detection risk:............................................................................................................7
CONCLUSION...............................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Audit relates to a comprehensive analysis of the accounting records of company or any
other entity in attempt to determine or check and records on the facts relating towards its
financial operations and the performance thereto. It must be pursued 'to enhance the validity of
reported information where validity can be specified as the congruence among the information
delivered and reality represented (Demartini and Trucco, (2016).
Audit Oversight Board, formed pursuant to Sec 31C of Securities Commissions Act,1993 and
functional since year 2010, is primarily responsible for auditing supervision and for committed
to ensuring trust in quality and validity of audited-final accounts in Malaysia. The study consists
of comprehensive review of 3 significant components of risks in auditing based the analysis of
published journals.
MAIN BODY
Objectives of Auditing:
Audit term corresponds to a precise and realistic review of records, accounts or
statements, tasks and findings in accurate and fair perception or within the material
aspect of financial condition in compliance with global reporting requirements (Graham, Bedard
and Dutta, (2018). This is standardized procedure for the collection and unbiased evaluation of
audit evidences to decide the degree to which environmental management program audit
standards laid down by the corporation are met. The purpose of auditing of enterprise's financial
statements and accounts is to allow auditing professional to effectively express a
significant opinion on whether financial statements are framed, in material respects, under the
relevant financial reporting system. Following are several key objectives of Audit, as follows:
 Accounts/Statements Verification: The prime objective of audit is to determine the
integrity & authenticity of accounting records. This carefully reviews each financial
transaction. Through accounting records it recognizes and eliminates frauds. The
examiner is granted free hands while doing audit of accounting books & is independently
of industry.
 Evaluating Accounting Policies: Each organization or entity has to obey those accounting
policies. Due to such accounting policies accounting books are framed. If an organization
has an efficacious accounting structure it can significantly raise its effectiveness. The

auditor 's responsibility is to review the company's accounting practices & give his
unbiased opinion.
 Error and Fraud Detection: Auditing can detect inconsistencies & frauds from accounting
records easily. Management has a responsibility to prevent & investigate mistakes &
frauds. Management locating the mistakes, however, often is difficult. This is by auditing
that management are assisted to identify mistakes & frauds. Despite this supervisors take
disciplinary action against such irregularities or frauds.
 Assurance to Stakeholders: Auditing ensures that each and every number displayed on
the financial statements are accurate. This assists in evaluating any amount of accounting
business accounts. Annual reports and FS are regarded credible by stakeholders because
they have been audited. Such financial statements thoroughly satisfy stakeholders.
There is also a significant aspect in auditing concept that is audit risk which is significant
to consider for auditor while performing audit (Salehi, Jahanbin and Adibian, (2019). Audit risk
may be characterized as risks that the auditing professional may not find mistakes or deliberate
mistakes throughout the evaluation of financial statements of corporation or entity. The
auditing risk is usually divided into two classes – risk related to the assessment of finance
materials and risks related to the proclamations produced by evaluation of financial documents.
Audit is required by the corporations to insure that their annual reports including reporting are
correct and reasonably fair to stakeholders. In order to protect against potential litigation
resulting from missing financial indiscretions, such as factual misrepresentations, auditors must
typically have malpractice protection. Here following is detailed review of major 3 components
of audit risks namely (i) Detection Risk, (ii) Control risk and (iii) Inherent Risk, as follows:
Review of control risk:
Based on the review of Journal: The Concept of Audit Risk, (2016), Control risk means
that internal controlling system of the enterprise can avoid or identify incorrect content
statements in timely manner. Control risk relates to a risk that inner control doesn't really act as a
protective measure to correct content misleading statements. The auditor should report the
components of internal control structure on basis of following processes: examination of the
prior audit results, evaluating the supervisory sector personnel with respect to the performance of
their roles and reviewing the working papers of the prior update. Control risk generally is
represented in variables (varying between 0 to 1) or comparative indicators-percentage figures

(spanning from 0 to Hundred percent) although at beginning and ending of the rage there are
extreme occurrences or cases. Control risk is sort of auditing risk which analyses accuracy of the
figures given by employees of enterprise. By measuring numbers inappropriately or recording it
wrongly, a business may unintentionally commit frauds. recognizing aspects in which these
problems can occur is important for the identification of control risks. When a regulation is poor,
there is significant risk that financial reports would be wrong, which may in turn imply
that auditors of the organization or other corporate executives will not catch it.
The very first situation (the starting of range) indicates that controlling systems are so
accurate there's no chance of mistake. Other side (ending of range) suggests that internal
controlling systems are ineffective and that there's a higher likelihood that errors may occur.
Typically, following the review of an internal controlling system, auditors tend to track
environmental circumstances (that are part of inherent risk), monitoring of accounting
framework and management processes. When an accounting system and controlling processes
are evaluated as reliable and appropriate, level of controlling risk (as a phase in the auditing risk
evaluation procedure) could be deemed to be small. The accuracy of the calculated probability
depends on their individual technical mindset. Ultimately, this can be inferred that, prior to the
implementation of the findings of audit, it is important to check and validate the prior phase
of projected risk control. Entities should have sufficient internal controls to avoid and identify
errors and frauds. Control risks are regarded to be higher if auditors does not have sufficient
compliance controls to deter and identify errors and frauds in annual FS. The level of control
risks could be greater, for instance , in a small-size company wherein the division of
responsibilities is not clearly specified and financial statements are compiled by individuals who
haven't had the requisite professional expertise in accountancy and finance related field. The
management team of the company is liable for developing , enforcing and sustaining a
framework of entity's internal controls which can effectively deter loss of assets. Similarly, it is
not straightforward for a organization to establish a sound network of internal controlling. To
order to sustain a stable system related to the internal controls, managers needs to adjust the
system regularly to order to respond to emerging developments in industry. Risk management is
due to the shortcomings of corporation 's internal management framework. When internal
control mechanisms are not checked regularly, they are prone to losing their effectiveness.
Management has to review internal controlling system on a yearly basis and upgrade internal

checks (Arens, Elder and Beasley, (2012). Following are several key factors which may lead to
increase in control risks, as listed below:
 Lack of segregation of different duties within entity.
 No proper authorisation on entering transactions, Modifications and alternations in
transactions already made.
 Lack of effective verification of Transactions.
 Lacking transparency within the selection procedures of supplier.
Organizations are establishing internal controls to handle environments which are
actually inherently risky. An enterprise can carry out internal checks to reduce risk of
understatement of payables. Instances of these internal controls shall involve:
 The CFO examines the specifics of the accounts payable on ending of specific period as
well as decides whether list of all payables is complete.
 Payables manager examines all receipts and invoices which are reported under payables
system.
 Manager may ask subordinate staff regarding invoices which remain unprocessed as on
year ending.
 Different division heads must analyse budgeted-to-actual reports.
Yet even though the company has carried out the necessary internal controls and related
steps, there's no assurance that risk can be completely eliminated. Because such, portion of the
risk could remain. That form of risk regarded as residual risk, because this is risk that remains
after organization has carried out internal controls.
Review of inherent risk:
As per review of another journal “Audit Risk Management And Its Affect On The Audit
Of The Financial Statement. (2018)” Inherent risk (current, systemic or cumulative risk) could
not be regulated and the circumstances of its emergence need to be analysed in the
planning/scheduling of the auditing process. Inherent risk occurs as a function of the complexity
of different transactions, forms of different transactions or nature of balance of accounts. Such
risk is subject to value of accounts and the type of transactions and accounts, therefore subject to
false content statements which which occur in the presence of some sort of internal
controlling mechanism. Inherent risks are uncertainty or risk resulting from human or company
fault records, given that appropriate internal accounting measures are in effect. The auditor

evaluates the extent of inherent risks on the basis of his professional judgement, taking into
consideration variables that influence the presence of inherent risks and the frequency of which
could not be managed. Such considerations may be as follows:
 Conditions in an enterprise's environment in the context of relationship: enterprise-
customer, as well as affecting annual financial statements;
 Particular accounts as well as transactions that are majorly subjected to review.
Inherent risk considerable risks that audit team and reviewers need to check for together
with control risks and identification danger while analysing financial reports. The examiner or
observer seeks to obtain an overview of the essence of the company when evaluating
controlling risks including inherent risks whilst performing an auditing process or an analysis of
a company. If here inherent as well as control risk is relatively high, auditing professional may
set detection risks to a passably lower level to maintain a acceptable level of total audit risk.
Thus lower the detection risk, auditor may take action by selective audit choices or expanded
samples to strengthen audit procedures. Organisations functioning in heavily controlled industry
sectors, like financial sector, are much more prone to be at greater inherent risk , particularly if
the corporation doesn't even have inner audit division or has an audit unit without a financially
history supervisory committee. The overall risk faced to the organization often relies on
overall financial exposure generated by an inherent risk unless exposure of accounting
mechanism fails. The form of auditing risk that could not be detected by the organization 's
internal auditing professionals or other corporate executives is an intrinsic risk. In attempt to
avoid risk components of audits, corporations should have a set of practices in position to,
eventually, pinpoint any issues. Recognizing these kinds of auditing risks includes a
straightforward auditing plan, audit technique and audit strategic planning. An auditing plan is a
guidance that must be strictly adhered to when carrying out internal audit. This lists all evidence
which requires to be collected, and also the pertinent numbers. Auditing approach is risk analysis
technique that integrates internal processes with anticipated external outcomes. Eventually,
auditing strategy is being used to create an audit program, outlining how all elements as well
as timing and personnel involved are to be enforced.
Review of detection risk:
Notwithstanding inherent risks as well as control risks, auditing activities often
cover detection risks arising from ineffective or insufficient auditing procedures, which can

require checking of such transactions random basis (or for any purpose) chosen samples of
certain transactions. This form of auditing risk represents the probability of mistakes
that auditors are unable to report through independent analytical processes and then have to
subsequently check the data. The detection risk influences the analysis of inadequacy of internal
controls system, and the evaluation of the insufficiency of oversight.
According to the review of the journal Audit risk and corporate governance. (2016),
Inherent as well as control risk are generally measured simultaneously, since there
is higher degree of reciprocal interaction and positive association among them. Detection risks,
on the other hand, has inverse relationship. It ensures that in circumstances of higher inherent
and control risks, auditor must consider a reduced detection risk. Simply if internal control
framework is sufficiently accurate, auditor has no difficulty in gathering the correct evidence and
lowers detection risk which decreases the overall risks of making revision at an adequate
degree/level. In attempt to reduce the cumulative risk within audit ,an auditor shall devise a plan
to provide adequate competent documentation. If the overall auditing risks are higher than
average, or if auditor has evaluated these as high, auditor should respond to following acts:
selectively choosing experienced auditing team members; gathering more evidences than is
appropriate for routine audit, carefully reviewing evidence gathered from a variety of credible
sources, including preparing a more comprehensive and thorough audit report.
Detection risk implies to risk that an auditor may fail in detecting material misstatements
within financial statements under audit. There's always certain level of detection risks under
audit engagement owing to constraints/limitations of auditing process. However, the
identification danger could resulting in auditor providing inappropriate opinion, most
inappropriate opinion: an unmodified opinion upon materially inconsistent financial statements.
The goal of auditor is thus to maintain the likelihood of detection risks within an acceptable
range. Detection risk would be higher where the organization has given non-assurance
audit services to audit client culminating in a substantial material effect on enterprise's financial
statements. That is since the organization is less prone to find misstatements in work done by the
client itself. Detection risk can be minimized by adjusting composition of auditing team in such
a way that all those who operated on non-assurance activity are not form part of auditing audit
team and therefore by having work checked by a professionally qualified independent audit
professionals. Detection risk relating to an area of stock and revenues costs is lowered if more

stringent checking is carried out on transactions merely prior to the ending of year and just after
year ending. If the auditor's estimation of probability of the material misstatements at year
ending is high but small for the remainder of year, the auditor performs his analysis on cut-off
check.
Auditors seek to identify the targeted detection level, that is feature of planned level
of auditing risk; degree of materiality as well as the probability of mistakes, since detection risk
dictates the quality, pace and duration of detection for independent operations. Therefore, the
greater the volume of data, lower the probability of errors not detected are present, so this
decreases detection risk proportion. Evaluating auditor's target level of auditing risks and
degree of materiality, and also determining the existence of errors within financial statements
which is to be reviewed, decides the degree of detection risks that auditor intends to consider,
and therefore the extent of independent measures to be enforced. The smaller detection risk that
is expected, the higher the requirement for more detailed and nuanced independent practices.
Considering that the degree of auditing risk is less than the required level of protection, but
if higher materiality levels are less than anticipated, then in these situations risk of
entity's financial statements misrepresentation becomes unconfirmed big, the likelihood of
detection would be lesser then independent auditing procedures will be wider. Past comments
about the essence and attributes of other risk forms indicate the requirement for risk
measurement that is an independent auditors' key duty (Identifying Influencing Factors of Audit
Risk Model. (2018).
CONCLUSION
From the above study this has been articulated that The auditing process is a systematic
mechanism of providing an unbiased review of the facts relating to records or incidents of a
financial nature, in order to determine the extent of compliance of such records with pre -
determined criteria, and to convey the findings of the specific parts.

REFERENCES
Books and Journals:
Demartini, C. & Trucco, S., (2016). Audit risk and corporate governance: Italian auditors
perception after the global financial crisis. African Journal of Business
Management, 10(13), pp.328-339.
Graham, L., Bedard, J.C. & Dutta, S., (2018). Managing group audit risk in a multicomponent
audit setting. International Journal of Auditing, 22(1), pp.40-54.
Salehi, M., Jahanbin, F. & Adibian, M.S., (2019). The relationship between audit components
and audit expectation gap in listed companies on the Tehran stock exchange. Journal of
Financial Reporting and Accounting.
Demartini, C. & Trucco, S., (2016). Does intellectual capital disclosure matter for audit risk?
evidence from the UK and Italy. Sustainability, 8(9), p.867.
Arens, A., Elder, R & Beasley, M., (2012). Auditing and Assurance Services 14th Edition.
Editura Pearson Prentice Hall, New Jersey, p.250
Online:
The Concept of Audit Risk. (2016). [Online]. Available
through:<https://www.researchgate.net/publication/303997071_The_Concept_of_Audit
_Risk>
Audit Risk Management And Its Affect On The Audit Of The Financial Statement. (2018).
[Online] Available through:
<https://www.researchgate.net/publication/326461256_AUDIT_RISK_MANAGEMEN
T_AND_ITS_AFFECT_ON_THE_AUDIT_OF_THE_FINANCIAL_STATEMENT>
Audit risk and corporate governance. (2016). [Online]. Available through:
<https://academicjournals.org/journal/AJBM/article-abstract/90DC51C59862>
Identifying Influencing Factors of Audit Risk Model. (2018). [Online]. Available through:
<https://pdfs.semanticscholar.org/bf95/4fe2a348a8a4715340a41295682dba1747f2>