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Unit 11: Introduction to Special and Efficiency Audit

will be adequate to express an opinion about the overall truth and fairness of the total data Notes
within a reasonable range of precision and with reasonable confidence.

Notes It is important to recognize that certain testing procedures do not come within the
definition of sampling. Tests performed on 100% of the items within a population do not
involve sampling.
2. Audit Risk: Audit risk is the risk that an auditor may give an inappropriate opinion on
financial information that is materially misstated.

Example: An auditor may give an unqualified opinion on financial statements without
knowing that they are materially misstated. Such risk may exist at overall level or while verifying
various transactions and balance-sheet items.
(i) Audit risk at the financial statement level - Audit risk is considered at the financial
statement level during the audit planning process. At this time, the auditor should
undertake an overall audit risk assessment based on his knowledge of the client’s
business, industry, management, control environment and operations. Such an
assessment provides preliminary information about the general approach to the
engagement, the auditor’s staffing needs and the framework within which materiality
and audit risk assessments can be made at the individual account balance or class of
transactions level. As part of this overall risk assessment, the auditor should consider
whether there is potential for pervasive problems, for example, liquidity or going
concern problems.

(ii) Audit risk at the account balance and class of transactions level - The majority of audit
procedures are directed to, and carried out at the account balance and class of
transactions level. Accordingly, audit risk should be considered by the auditor at
this level taking into account the results of the overall audit risk assessment made at
the financial statement level. To assess inherent risk, the auditor uses professional
judgement to evaluate numerous factors, examples of which are:
At the financial statement level:

(a) the integrity of management;
(b) management experience, knowledge and changes during the period;

Example: The in-experience of management may affect the preparation of the financial
statements of the entity;
(c) unusual pressures on management;

Example: Circumstances that might predispose management to mis-state the financial
statements, such as an entity in an industry experiencing a large number of business failures or
an entity that lacks sufficient capital to continue operations;

(d) the nature of the entity’s business;

Example: Its technological obsolescence of products and services, complex capital
structure, significance of related parties, and the number of locations and geographical spread of
its production facilities;

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