The audit is the inspection of an organization's accounts, followed by a physical inventory check to ensure all departments maintain a documented system of documenting transactions.
It is done to make sure the organization's financial accounts are accurate. Let us see in detail about Audit Risk assessment Procedures and Auditor approach to Risk assessment.
What is Audit risk?
Audit risk is when the Auditor fails to detect errors while examining the financial statements of a company and can be solved with a good risk assessment. Audit risk can be managed by auditors through appropriate risk assessment and audit planning. This includes identifying and evaluating inherent and control risks and developing appropriate audit procedures to address those risks. Furthermore, Auditing firms should have malpractice insurance to manage the legal liability due to the audit risk.
Audit risk exposes auditors to legal liability and penalties if they provide an unqualified opinion on financial statements that include a substantial misrepresentation that breaches laws or regulations. For example, Amazon was recently penalized $886 million for suspected GDPR violations.
Understanding Material Misstatements
Material misstatements arise in two forms. One is a fraud, and the other is due to an internal error. When the company's internal audit team intentionally issued the wrong financial statement to cover their fraudulent act, it is considered fraudulent financial reporting.
When the company fails to follow the accounting standard, primarily due to the carelessness of the management, it leads to errors while maintaining the financial statements. The negligence of the company's internal team caused this error. To reduce Audit risk, Auditing firms must apply appropriate audit procedures in many ways.
Audit Risk Types
The types of Audit risk are Inherent Risk, Control risk and detection risk. The inherent and controlled Risk together is called risks of Material misstatements. A balanced audit risk model is comprised of all three audit risks. By balancing it, an auditor can determine how comprehensive the audit work is.
1. Inherent Risk
Inherent Risk is the possibility of material misstatements on the client's financial statement. The incorrect information may be an error or omission in a financial statement, primarily due to a factor other than an error missed to correct by the internal audit team.
The inherent Risk occurs when the financial transactions are complex and have a complicated company's business model. This Risk is a worst-case scenario only when the internal team fails to find the error. The companies must have an internal audit team with high financial qualifications to reduce the occurrence of inherent Risk.
2. Control risk
The control risk is when the client's internal audit department fails to detect the potential material misstatement. The client's internal audit team or internal controls use accounting and auditing processes in their financial department to reduce the control risk.
The internal audit department uses the internal auditing processes the company's finance department insists on. These processes ensure the correct financial reporting, reducing miscalculations and errors. The internal team assists clients in adhering to rules and regulations and guards against employee fraud and asset theft. They help to maintain efficiency by identifying problems and correcting the errors before they are detected in an external audit firm.
3. Detection risk
The detection risk is that the Auditor fails to detect the existing material misstatement in the client's financial statements. These material misstatements may be due to either fraud or error. Auditors use audit processes to find these inaccuracies. The detection risk can be avoided with correct audit procedures.
The detection risk presence is unavoidable, and Auditor's goal must be to reduce the Risk to a greater extent. The auditors should do the various procedures to limit the detection risk and maintain it to an acceptable level in overall performance.
Risk Assessments Procedure
A risk assessment identifies and evaluates risks to use that information to guide the audit procedures required to justify the amounts stated in the financial statements.
A risk serves as the foundation for the audit plan in a risk assessment audit approach. However, the audit plan is typically constructed from an audit universe consisting of departments or procedures, despite many audit departments believing they are risk-based.
An accurate risk-based audit approach begins with evaluating the most significant risks to management. All plan audits are created to address such risks and give senior management information.
Let us see the approaches to Risk Assessment by Auditors.
1. Quick Assurance
Rapid Assurance entails conducting all elements of a typical assurance engagement in a condensed period with a commitment to just one week of fieldwork to reduce audit exhaustion in processes where documentation is vital. Typically, Rapid Assurance is broken down into three steps, each lasting 3-5 weeks:
- Planning and research for the auditor (1-2 Weeks)
- Fieldwork on-site (1 week)
- Finish testing and writing reports (1-2 weeks)
The auditor should possess good project management discipline and an in-depth understanding of the processes being audited due to the compressed period.
2. Real-Time Feedback
In Project Assurance, the auditor assesses the project team's governance, risk management, and control ability to immediately recognize and address project-related hazards. They also assume the facilitator position by encouraging the discussion of risk and control throughout a project.
A subject matter expert or guest auditor who can help spot hazards would be an excellent choice to execute a Project Assurance method, as would an auditor with past expertise in project or program execution.
3. Facilitated Self-Assessment
Using this workshop-style method, a department can review and commit to enhancing governance, risk management, and internal controls for a process or function. After all, someone is more motivated to solve a problem if they are part of its identification.
An auditor must be adept at facilitating small groups and flexible to change course midstream. A department assists in identifying and committing to improving its response to the particular issues encountered with the support of an external mentality and the capacity to encourage effective risk management and control behaviors.
4. Framing Assurance
A method based on maturity models enables auditors and audit clients to evaluate a process's efficacy while identifying the skills required to enhance the process to achieve goals. Both options are Capability Maturity Model Integration (CMMI) or creating customized models.
The auditor must feel at ease describing standard maturity models, like CMMI, and their technique for developing a unique model.
5. Data Analytics
Audit engagements can include data analysis tools to deliver deeper insights, improved risk management, and operational efficiency.
Data analytics will be more accessible if database administrators and reporting teams work together. The ideal auditor will be able to create scripts and be analytical, technical, and logical in their thinking. It would be best not to let a lack of technical expertise keep you from using data analytics.
Risk Audit and Assessment Services
With the proper risk audit and risk assessment procedures, the Auditors can improve their performances and provide good results to the clients. The Auditor's correct mindset to tackle risks and using their collection of risk-based approaches make it possible to have accurate results and a positive impact on their organization.
In case you are concerned about risks in your audit statement, you can always reach out to us! BMS Auditing is a global audit firm that provides risk audit and assessment services to businesses around the world. We conduct a comprehensive review of the business's operations, financial statements, and internal controls. Based on the findings of the review, BMS Auditing creates a risk assessment report that outlines the identified risks and how to improve its internal controls and risk management processes.
