🎧 Listen to more in-depth episodes on Spotify!

Audit Risk Model Simulation

A step-by-step guide to identifying, assessing, and responding to the risk of material misstatement.

1

Identify Risks

2

Assess Risks

3

Respond to Risks

Step 1: Identify Risks

Risks can affect the entire financial statement or specific assertions. Drag each risk into the correct category to proceed.

Risk Pool

Lack of qualified accounting staff.

Inventory is susceptible to obsolescence.

Management override of controls is common.

Complex revenue recognition for a specific contract.

Financial Statement Level Risks

Assertion Level Risks

Step 2: Assess Risks (The Heat Map)

Assess inherent risk by considering likelihood and magnitude. Risks in the red zone are Significant Risks. Drag the scenario to the correct quadrant.

Scenario:

A client holds complex derivative instruments that are difficult to value, and a small error could result in a huge misstatement.

Magnitude

Likelihood

Low/Low

Low/High

High/Low

High/High

Step 3: Respond to Risks (The "NET")

Your response depends on the assessed risk. For a High Risk area, adjust the sliders for Nature, Extent, and Timing to design an appropriate audit response.

Nature: Tests of Controls

Extent: Smaller Sample

Timing: Interim Testing