Audit Approach

1484 Words6 Pages
risk
The approach adopted by an audit firm to a specified audit assignment will be a key factor in determining the outcome of the audit. If auditors fail to adopt the correct audit approach then the likelihood of audit failure increases, failure which could lead to a damaged reputation and potentially costly litigation against the firm. This article is the first of a series on risk‑based auditing and audit evidence. AUDIT APPROACHES Essentially there are four different audit approaches: the substantive procedures approach the balance sheet approach the systems-based approach the risk-based approach. The substantive procedures approach This is also referred to as the vouching approach or the direct verification approach. In this approach,
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When adopting this approach, in order to

technical

facilitate the identification of risks and the assessment of their effect on the financial statements, risks are categorised as: financial risks – such as cash flow risks compliance risks – such as breaching of laws and regulations risk operational risks – such as loss of key employee risk and loss of data risk. Specific use of the business risk approach to an audit will be covered in the second article of this series. The ultimate objective of adopting the business risk approach is to reduce audit risk – the risk that the auditor will give an inappropriate opinion on the financial statements. Students should therefore appreciate how business risk is linked to audit risk and how the business risk approach is integral to the use of the audit risk model when planning audit work. FINANCIAL STATEMENT/DETECTION RISK Students should be aware that audit risk is a function of financial statement risk (the risk that the financial statements are materially misstated), and detection risk (the risk that the auditor will not detect such misstatements). Financial statement risk This has two components – inherent risk and control risk. Inherent risk is the susceptibility of an assertion to a misstatement which could be material (individually or when aggregated with other misstatements), assuming that there were no related internal controls. It is limited either to the nature of the item in the
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