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Risk-Based Audit Essentials

1. A risk-based audit begins with assessing the types and likelihood of misstatements in account balances and adjusts the audit work based on the likelihood of material misstatements. 2. Key factors to consider in implementing the audit risk model include high-risk activities, non-routine transactions, matters requiring judgment, and potential for fraud. 3. Limitations of the audit risk model include inherent risk being difficult to formally assess and the components not being fully independent as assumed in the model. Risk is also judgmentally determined and audit technology is not fully developed.

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194 views19 pages

Risk-Based Audit Essentials

1. A risk-based audit begins with assessing the types and likelihood of misstatements in account balances and adjusts the audit work based on the likelihood of material misstatements. 2. Key factors to consider in implementing the audit risk model include high-risk activities, non-routine transactions, matters requiring judgment, and potential for fraud. 3. Limitations of the audit risk model include inherent risk being difficult to formally assess and the components not being fully independent as assumed in the model. Risk is also judgmentally determined and audit technology is not fully developed.

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Jnn Cyc
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OVERVIEW OF RISK-

BASED AUDIT
PROCESS
Mary Rose A. Cotanas
Risk-based Audit Approach
An audit approach that begins with an assessment of
the types and likehood of misstatements in account
balance and then adjusts the amount and type of
audit work, to the likehood of material misstatements
occurring in account balances.
FACTORS TO CONSIDER
IN IMPLEMENTING THE AUDIT
RISK MODEL
Factors to consider in implementing the audit risk model

1. High-risk activities
2. Existence of large non-routine transactions
3. Matters requiring judgment or management intervention
4. Potential for fraud
LIMITATION OF THE AUDIT RISK
MODEL
Limitation of the audit risk model
a. Inherent risk is difficult to formally assess
b. Treats each risk component as separate and independent
that each component  are not independent
c. Audit risk is judgmentally determined
d. Audit technology is not fully developed that each
component of the model can be accurately assessed
RISK BASED-AUDIT VS.
ACCOUNT-BASED AUDIT
RISK BASED-AUDIT VS. ACCOUNT-BASED
AUDIT
 Views activities of risks to strategies and  Understanding of control
objectives, then management's plans
and processes to mitigate risk  Assess control risk for types of error and
frauds
 Understanding of Client's objectives
 Risks are identified
 Determined management's plan to
mitigate the risk
 Determined management's plan are in
place and operating effectively
THE RISK BASED-AUDIT
PROCESS
3 Phases of Audit Process

Risk Risk
Reporting
assessment  response 
 Reasonable assurance – inform users that auditors
do not guarantee or insure the fair presentation of
the financial statements

 Free of material misstatement- inform users that


auditor's responsibility is limited to material financial
information
UNDERSTANDING AUDIT
RISK MODEL
Nature of Risk
Risk- a concept used to express uncertainty about events
and/or their outcomes that could have a material effect on
the organization.

Four critical components of risk


1. Audit Risk
2. Engagement Risk
3. Financial Reporting Risk
4. Business Risk
Four critical components of risk
1. Audit Risk 
The risk that the auditor fails to find material
misstatements in the client's financial statements
and thereby inappropriately issues an unqualified
opinion on the financial statements.
Four critical components of risk
2. Engagement Risk
It is controlled by careful selection and retention of
client.
Four critical components of risk
3. Financial Reporting Risk 
Those risk that relate directly to the recording of transactions
and the presentation of financial data in an organization's
financial statements.

Factors affecting business risk:


Competence and integrity of management
Incentive to management to misstated financial statements
Complexity of Transactions
Internal Control
Four critical components of risk
4. Business Risk 
Those risk that affect the operations and potential
outcomes of organizational activities.

Factors affecting business risk:


 Economic climate
 Technological change
 Competition
 Business volatility
 Geographic location
Integration of Concepts of Materiality and Risk
in a Risk-Based Audit
1. Risky areas of a business must be identified
2. Auditors need to develop approaches and methodologies
3. Audits involve testing or sampling and thus cannot provide absolute assurance
4. Not all clients are worth accepting
5. Competition of clients among audit firms is high
6. Auditors should understand society’s expectations of financial reporting
The end of reporting!

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