Audit risk: means that there is a chance that we will give the wrong audit opinopn

Misstatement: in summary it is:

1. a number which is incorrect
2. an acoounting treatment not in line with the relevant accounting standard
3. a missing and necessry disclosure
4. an inadquate disclosure

three elements of audit risk:

inherent risk*control risk * detection risk

inherent risk relates to alients specific factors, except those relating to internal controls. such as  the risk of inventory or receivables are overvaluded , or profit is misstated to achieve a bonus

control risk: clients internal control is weak

detection risk: not familiar with the clients and its business environment may increase the risk of detection 

attitude of professional scepticism

excercise professional judgement

components of audit risk 

comnce[ts of materiality and performance materiality

materiality： an item is materility if its omission or misstatement could reasonable be expected to affect the economic decision of users.

omission : a number is left out or missing

misstatement: wrong record or wrong

number

materiality level:  guidelines of materiality:

0.5-1% of turnover

1-2%  of total assets

5-10% of profit

performance materiality: an amount, less than materiality, to  reduce the probability that aggregate of uncorrect misstatements, exceed materiality as a whole.

planning: nature

                purpose

                analytical procedures

Key ratios:

Repercussion of audit risk:

we can be sured for negligence

cash  penalties

loss of reputation 

risk assessment :

1. identify the area where errors may exist
2. plan audit procesures
3. perform a more efficient and effective audit
4. reduce the chance of give the wrong audit opinion
5. reduce the risk of being sued , paying penalty(damages) or lossing reputation.

technical of perform risk assessment:

1. makeing enquiries of knowledgable people
2. conducting analysitical procedures on the financial statement numbers
3. observing things at the clients
4. inspecting documents

response of risk assessment:

1. assigning risky area to more experienced team
2. increase level of supervision over the audit team
3. introducing  unpredictability into testing 
4. detailed , sustantive test 
5. professional scepticisim 

understand the entity:

1. its environment (industry condition, laws and regulation, competition,...)
2. the entity(operations, ownership and fiance, objectives and stratages, incentive and pressure)
3. the applicablefiancial report framework (revenue recognition, unusual or complex transactions, areas of lack of authourity guidance)
4.  internal control( control environment, control activities, internal audit functions, how it use its interal control suystem)

ways to understand the clients:

observation and discuss: website/brochures, all analytical procedures: enquire, conduct analytical of statement numner, observation inspection document)

auditors experience and knowledge, industry reserceh professional scepticism

Analyticalprocedure： is the technical approach to test the financial statement numbers by ways of caluculate or analysis : which include: compare similar pieces of information ; compare the same number across periods, compare the number with budget, compare to non financial information 

identify the most likely misstatement area and plan more work on this area.