QUESTION 8

In terms of ISA300, the audit plan must contain a description of the nature, timing and extent of planned risk assessment procedures sufficient to assess the risk of material misstatements. Audit is a combination of inherent risk, control risk and detection risk. The auditor must there evaluate the materiality and risks specific to the company. Materiality limits should be set at the planning stage of the audit to act as a guideline for deciding whether adjustments should be made to the financial statements.

Required

(a)Briefly describe the terms 'inherent risk', 'control risk',' detection risk' and 'audit risk'

(8 marks)

(b)List the eight factors which the auditor would bear in mind when assessing the audit risk of a company. Your answer should talk of inherent and control risk.(4 marks)

(c)Define and explain the Risk Equation, describing how it should be used in auditing planning. (3 marks)

(d)Discuss the considerations which would determine whether an item is material in relation to financial statements(4 marks )

(e)Discuss the validity of the statement that "materiality limits should be set at the planning stage of the audit and should be rigidly be adhered to throughout the audit."( 6 marks)