Audit Risk Analysis And Control in Organizations

Running head: AUDIT RISK, ANALYSIS AND CONTROL IN ORGANIZATIONS
Audit Risk, Analysis and Control in Organizations
Name of the Student
Name of the University
Author Note

AUDIT RISK, ANALYSIS AND CONTROL IN ORGANIZATIONS1
Table of Contents
Answer to Question 1.................................................................................................................2
Risk of Material misstatement...............................................................................................2
Factors that would affect the risk of material misstatement..................................................3
Answer to Question 2.................................................................................................................5
Audit Risks and Response of Auditors to assessed risks.......................................................5
References................................................................................................................................10

AUDIT RISK, ANALYSIS AND CONTROL IN ORGANIZATIONS2
Answer to Question 1
Risk of Material misstatement
A material misstatement refers to the incorrect information reported in the financial
statements, which may have a negative impact on the users on making economic decisions
(Knechel and Salterio 2016). Misstatements in reports are material when it influences the
decision-making, which is based on these reports. As per para A136 of ASA 315, potential
misstatement can be material and judged through its magnitude or the item’s nature and
circumstances. Material misstatement occurs due to an error or fraud (Backof, Bowlin and
Goodson 2014). An error occurs on the time when the misstatement has done unintentionally
while misstatement that has made intentionally comes under then category of fraudulent
activity. Material misstatements can be factual and judgmental.
The risk of material misstatement denotes to those risks that the organization has
misstated in its financial reports to a degree of material (Knechel and Salterio 2016).
According to Para 25(a) and 25(b) of ASA 315, the auditors can do the risk assessment for
material misstatement in two different levels that are at assertion level and at the financial
statement level.
According to para A122 of ASA 315, at the financial report level, risk of material
misstatement relates to the financial statement as a whole and has the potential to affect
several assertions. Para A123 states that risk may derive in specific from a poor control
environment (Auasb.gov.au 2020). As per ASA 315 Paragraph A126, risk of material
misstatement in respect with the transactions, disclosures, and account balance at the
assertion level are necessary to be considered. Considering will assists the auditors in
determining timing, nature and other audit processes so that to obtain enough proper audit
proof at the assertion level.

AUDIT RISK, ANALYSIS AND CONTROL IN ORGANIZATIONS3
Factors that would affect the risk of material misstatement
ASA 315 states the entity and Its Environment consists of numerous factors that an
auditor has to consider in respect to the risk of material misstatement. Along with the internal
factors, ASA 315 discusses with Paragraph A25 that states about Industry factors, para A27
states about Regulatory factors, and para A30 says other external factors.
According to the given information, J Audrey Pearce as an audit partner of Pearce
Green is considering risk of audit at the entire financial statement level for Homes South Ltd
that is a finance company. The factors that are likely to affect the risk of material
misstatement are as follows:
I. Volatility in the Interest Rates
First factor is related to interest rates. Homes South Ltd is constantly gaining
additional profits than the industry average by means of marketing mortgages on properties in
wealthy rural areas. Homes South Ltd packages and sells mortgages to large investment
trusts. In spite of being volatility in the interest rates, Homes South Ltd is able to sell its
mortgages on a continuous basis.
The external factors related to the entity and its environment can affect the risk of
material misstatement. According to Para A30 of ASA 315 related to the external factors, the
auditor has to consider the general economic condition, availability of financing, interest
rates, currency revaluation or inflation.
Volatility in the interest risk has the capability to increase or decrease the value of
mortgages. However, Homes South Ltd has considerable growth in recent years. Thus, there
may be a possibility to have differences in the interest rate dealt with the large investment
trusts (Bhattacharjee, Maletta and Moreno 2015). The auditor may have to consider the