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Risk-Based Audit Process Overview

This document provides an overview of risk-based auditing. It explains that a risk-based audit approach assesses the likelihood of misstatements in account balances and adjusts audit work accordingly. It lists factors to consider like high-risk activities, non-routine transactions, and potential for fraud. The document also notes some limitations of the risk-based audit model and compares it to an account-based audit approach. Finally, it defines key components of risk in auditing like audit risk, engagement risk, financial reporting risk, and business risk, and ways to control audit risk.

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145 views22 pages

Risk-Based Audit Process Overview

This document provides an overview of risk-based auditing. It explains that a risk-based audit approach assesses the likelihood of misstatements in account balances and adjusts audit work accordingly. It lists factors to consider like high-risk activities, non-routine transactions, and potential for fraud. The document also notes some limitations of the risk-based audit model and compares it to an account-based audit approach. Finally, it defines key components of risk in auditing like audit risk, engagement risk, financial reporting risk, and business risk, and ways to control audit risk.

Uploaded by

aragonkaycy
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© All Rights Reserved
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CHAPTER 8: OVERVIEW OF RISK-

BASED AUDIT PROCESS

AAP
Risk-Based Audit Approach

Risk-Based Audit Approach – is an audit approach that begins with an


assessment of the types and likelihood of misstatements in account balance
and then adjusts the amount and type of audit work, to the likelihood of
material misstatements occurring in account balances.
FACTORS TO CONSIDER IN
IMPLEMENTING THE AUDIT
RISK MODEL

1 High-risk activities

Existence of large non-routine


2 transactions
Matters requiring judgement or
3 management intervention.

4 Potential for fraud.


LIMITATION OF THE AUDIT RISK MODEL
Inherent risk is difficult to formally assess.
LIMITATION OF THE AUDIT RISK MODEL
The model treats each risk component as separate and independent
when in fact the components are not independent.
LIMITATION OF THE AUDIT RISK MODEL
Audit risk is judgmentally determined.
LIMITATION OF THE AUDIT RISK MODEL
Audit technology is not so fully developed that each
component of the model can be accurately assessed.
Risk-based audit vs. Account-based audit

Risk-Based Audit Account-Based


Audit
Risk-Based
Audit
In risk-based audit, the audit team views all activities in the organization first in terms of
risks to strategies and objectives and then in terms of management’s plans and processes
to mitigate risk. The auditors obtain an understanding of the client’s objectives. Then
risks are identified and the auditors determine how management plans to mitigate the
risk and whether those plans are in place and operating effectively.
Account-Based Audit

In account-based auditing, auditors first obtain an understanding of


control and assess control risk for particular types of error and frauds
in specific accounts and cycle.
The Risk-Based Audit
Process

Phase I Risk Assessment

Phase II Risk Response

Phase III Reporting


REASONABLE ASSURANCE
intended to inform the users that Auditors do not
guarantee or insure the fair presentation of the financial
statements.
FREE OF MATERIAL MISSTATEMENT
intended to inform the users that the auditor’s responsibility is limited to
material financial information. Materiality is important because it is impractical
for auditors to provide assurance on immaterial amounts.
Nature of
Risk
Risk is a concept used to express uncertainty about events
and/or their outcomes that could have a materia l effect on
the organization.
CRITICAL COMPONENTS
OF RISK
Audit Risk

The risk that an Auditor may give an unqualified


opinion on financial statements that are materially
misstated.
Engagement Risk

The economic risk that a CPA Firm is exposed to simply because it is


associated with a particular client including loss of reputation, inability of
the client to pay the auditor, or financial loss because management is not
honest and inhibits the Audit process. Engagement risk is controlled by
careful selection and retention of client.
Financial Reporting
Risk
Those risks that relate directly to the recording of
transactions and the presentation of financial data in an
organization’s financial statements.
Business Risk

Those risks that affect the operations and


potential outcomes of organizational activities.
WAYS TO CONTROL
AUDIT RISK
Avoid audit risk by not accepting
certain companies as client, i.e.
reduce engagement risk to zero
Set audit risk at a level that the
auditor believes will mitigate the
likelihood that the auditor will fail to
identify material misstatements.

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