No Risk indicator Description of risk Component

of audit risk
1. Operations in regions or The AFS may be materially misstated, as the Inherent risk
countries with strict entity might not comply properly with the
regulations / different relevant laws and regulations, possibly
regulations to SA. resulting in material misstatements of
unrecorded liabilities, expenses, etc. For
instance, JSE regulations, environmental
laws, labours laws, etc.
2.  Liquidity issues. The AFS may be materially misstated, as the Inherent risk
 Operating losses going concern assumption might not be
 Loss of significant properly accounted for and/or disclose due
customers or suppliers. to (relevant risk indicator).
 Constraints on The AFS may be materially misstated because
availability of capital and of the entity engaging in fraudulent financial
credit. reporting to hide a going concern threat

 Changes or loss of key due to (relevant risk indicator).

personnel.
 Pending significant
litigation.
 Operations in regions or
countries that are
economically unstable.
 Operating in a
competitive
environment.
 Dependent on
technology.

1
3. Changes in the industry to The AFS may be fraudulently materially Control risk
which management do not misstated, as the entity might not comply
want to comply. with the changes to laws (Companies Act,
King IV, etc.), in the industry within which it
operates, indicating lack of integrity by
management.
4. Expanding into new The AFS may be materially misstated, as the Control risk
locations / decentralization control environment in other locations might
of the entity. not be operating effectively resulting in
fraudulent activities or errors.
5. Lack of personnel with The AFS may be materially misstated, as Control risk
appropriate accounting and errors might be occurring in the
financial reporting skills. preparation of financial records due to
personnel that lack accounting skills.
6. New client. The AFS may be materially misstated, as Detection risk
material misstatements and errors could go
undetected as we are not familiar with the
client.

The AFS may be fraudulently materially Inherent risk

misstated by management because the new
auditors have limited knowledge of the
entity.
7. Management’s integrity The AFS may be materially misstated, as the Control risk /
questionable. control environment might be Inherent risk
compromised by management who lack
integrity.
8. Use of work of third party The AFS may be materially misstated, as the Inherent risk
(component auditor [ISA third party might not be competent and
600] / internal auditor [ISA appropriately qualified to perform the work
610] /expert [ISA620]). required for audit evidence.

2
9. Management receive The AFS may be materially misstated, as Inherent risk
bonuses driven by profits. directors might engage in fraudulent financial
reporting, i.e. overstatement of revenue and
understatement of expenses to maximize
bonuses.
10. Financials to be used to The AFS may be materially misstated, as Inherent risk
obtain financing from the directors might engage in fraudulent financial
bank. reporting, i.e. overstatement of assets and
profits and under-statement of liabilities and
expenses to ensure that financing will be
obtained.

The financial statements are used by a third Detection risk

party to obtain finance, hence there is the risk
for auditor that misstatements are contained in
the financial statements and relied upon by a
third party.
11. Tight deadline. The AFS may be materially misstated, as Inherent risk
management might not have sufficient time to
properly account and disclose post-balance-
sheet events (subsequent events).

There is a risk that the auditor might not have Detection risk
sufficient time to obtain the audit evidence,
resulting in material misstatement going
undetected.

12. Listed on the JSE Ltd. The AFS might be materially misstated, as the Inherent risk
company might not comply with JSE
regulations, resulting in the delisting of the
company and affecting the going concern of
the company.

3
13. Change of the accounting The AFS may be materially misstated, as the Control risk /
software. financial data might not be properly transferred Inherent risk
from the old accounting system to the new
accounting system.
14. History of errors or The AFS may be materially misstated due to Inherent risk
significant adjustment at error, as the current financial statements might
year end. include material misstatements.
15. Managers are the owners of The AFS may be materially misstated, as Inherent risk
the entity (Owner managed). directors might engage in fraudulent financial
reporting to present the performance and
position of the entity in a more favourable light.
16. Entity required to produce The AFS may be materially misstated, as Inherent risk
group financial statements/ errors might occur during consolidation
Different accounting policies because it involves an intricate process
in a group / possibly resulting in material misstatements.
Different accounting
systems / reporting dates The AFS may be materially misstated, as Inherent risk
related party transactions might not be
eliminated on consolidation.
The AFS may be materially misstated, as the
consolidation might not be properly done in
terms of IAS 27.
17 Obtaining control of another The AFS may be materially misstated, as Inherent risk
company. IFRS 3 / IFRS 10 might not be properly
accounted for.