Abstract:
Audit risk examines the relevant assertions related to balances, classes of transactions, or disclosures contained in misstatements that could be material to the financial statements when aggregated with misstatements in other balances, classes, or disclosures and the risk that the auditor will not detect such misstatements. With the collapse of Enron involving the misstatement of one of the Big 4, Arthur Andersen & Co. in the US and the CMC and Uchumi scandals in Kenya involving the big audit firms Delloitte and PwC, the argument for audits for big audit firms as synonymous with detection of misstatement has become questionable. Despite several studies having been done on overall misstatement risk none of them has addressed pervasive audit risk. The general objective of the study was to examine audit risk assessment and detection of misstatement in annual reports in audit firms registered by RAB in Nairobi County. The study evaluated four audit risk assessment i.e. inherent risk, control risk, engagement risk and detection risk against detection of misstatement. The study adopted a descriptive research design and targeted all the registered audit firms by RAB in Nairobi county.the study employed systematic random sampling and had a sample of 254 firms. Data was collected from primary sources which involved a well structured questionnaire with an average reliability of 0.86. The data collected from the questionnaire was analyzed using SPSS and a regression model so as to establish whether the application of audit risk models statistically and significantly affects the detection of misstatement in financial statements. t-statistic was used to determine the significance level wherby the null hypothesis was rejected if it’s less then 0.05. A total of 254 questionnaires were administered and 155 were satisfactorily filled and considered for analysis, this formed 78%. The results revealed that the application of audit risk models statistically and significantly affects the detection of misstatement in financial statements. All the four risks tested had a t-test of less than 0.05, thus all the four null hypotheses were rejected. Hence the study concludes that audit risk model reduces the level of fraudulent financial reporting through detection of misstatement in audit practice and relevant recommendations were provided that would enhance the application of audit risk assessment in the audit of financial statement.
