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
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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
CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.
Audit risk is the risk that the auditor gives the wrong opinion – this can either be stating errors when there are none or when there are errors stating that there are none. This risk cannot be eliminated as auditors can only provide a reasonable assurance and not absolute, but instead this can only be managed and reduced to a minimum.
#3. Inherent Risk Factors; audit planning decisions. Businesses that face extreme competition are susceptible to many inherent risk factors – the measurement of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control. Complex valuation issues and related party transactions are two such factors that would affect audit planning decisions. Valuation issues may lead the audit team to request more evidence, if they choose to accept the audit at all. Risks such as inventory turnover leading to potential misstatements of inventory, costs of goods sold, or obsolescence of inventory may influence the audit firm’s decision to hire outside specialists to assist in the audit. Another inherent risk factor, client business risk (competitive
Preliminary analysis to understand the client‘s business and risk - Understanding the auditee’s business, environment, and risks
A review and an audit report are both a form of an attestation engagement. A Review, however, is less in scope so it provides a moderate level of assurance on the financial statements. It is considered a “sniff” of an audit, which comparatively provides reasonable assurance that no material misstatements occurred. Since a review deals with a limited scope, it does not provide the basis for expressing an opinion on the presentation of the
[pic]s a senior in a professional services firm, you have been assigned to plan the financial statement audit of a private company named Toy Central Corporation (TCC). In addition, the partner on the engagement has asked you to identify business risks that could adversely affect TCC’s sustained profitability, so that they can be brought to the attention of the company’s board of directors. These tasks will require you to draw on your knowledge of supply chain management, marketing, internal controls, audit assertions, and financial accounting.
Describe how you would conduct the audit process, incorporating the analytical procedures you would use to investigate selected business transactions?
Also another risk factor that will increase the company’s inherent audit risk is the situation of its cash flow. If a retail company has a negative cash flow which means it not generating enough cash to maintain its operations, the risk of misstatement will accordingly increase. As stated in Q1, auditors should spend more efforts on examine the cash accounts if the cash flow of the company shows some abnormal signals.
It is the susceptibility of an account balance or a class of transactions to a material misstatement, assuming that there were no internal controls. The inherent risk at Telstra is that there may be certain types of misstatements that may not be identified during the course of audit. The inherent risk associated with the audit of Telstra is ascertained based on the nature of the business. Telstra Corporation Limited have these kinds of risks:- inventory valuation risk, intangible assets valuation risk, foreign currency risk, interest rate risk, tax risk, amendment risk and compliance risk. All the above stated risks pose potential material misstatements on the financial statements and thus need to be addressed (Telstra
The audit risk is generally evaluated based on accounting firm policy and professional judgment. Our firm requires us to assess low audit risk, which is to be 0.05, for the audit client that generally has stable financial condition and achieve steady financial performance. Tiffany is profitable company and has strong financial position: the net income in 2012 and 2011 are $416M and $439M respectively, Net assets in 2012 and 2011 are $2,611M and $2,349M respectively. In addition, the market share of the company in jewelry industry ranks No.1 in US and No. 2 in the world. They could keep their position continuously due to brand power and valuable employees. Therefore, we determined our overall audit risk to be 0.05.
Auditors should plan the audit so that the engagement is conducted in an effective manner.
The aim of this report is to develop an audit plan using the 2007/2008 annual reports of the WesFarmers. This report will provide an understanding of the underlying concepts of an overall audit strategy. This strategy will bring forward the direction and scope of the WesfFarmers audit plan. This report will address five major points these are as follows:
Item 8: Inherent risk is indirectly affect by the turnover in the inventory audit department because the risk of fraudulent financial reporting increased. This situation probably cause by the upper management have fraud and then leave company, and this may also affect the auditor’s assessment of control risk. All accounts are affected since it relates to risk of fraudulent financial
When engaged in auditing a public firm, such as Apollo Shoe Inc., an auditor must determine when to trust in the company’s internal controls and when to ascertain auxiliary testing methods are obligatory to analyze control risks. The sales and collection cycle is rather a substantial fraction of the audit because this unique segment employs a multitude of documentation and records ranging anywhere from customer and sales orders, shipping documents, credit memos, and general journal entries; therefore, a working
Many companies define their risks during the business plan process, specifically during budgeting. A chief risk officer may call upon the heads of a company’s operating units and functional areas to prevent, detect, respond, evaluate, define. To identify financial risks associated with their business plans, Legal departments also tend to drive risk assessment because of the significance of financial costs of transgressing applicable laws and regulations. Legal- and financial-driven assessments are good starting points for the holistic approach required to meet new expectations for ethics.