How to Identify Audit Risk?
24

Nov 2020

Today we take a gander at one of the most misjudged pieces of auditing: audit risk assessment.

An Understanding of Audit Risk Assessment Procedures

Risk assessment is the establishment of an audit. For auditors, it is the way to comprehend the company and plan the audit strategies to give the most reliable data to the company.

Audit risk assessment strategies are performed to acquire a comprehension of your company and its current circumstance, including your company's internal control, to recognize and evaluate the risks of material misstatement of the financial proclamations, regardless of whether because of misrepresentation or mistake. These techniques usually happen before your financial year has been finished and incorporate different methodologies; for example, inquiries with management and other chosen workers, systematic strategies, perceptions of controls in operation, and archives examination to show controls have been executed.

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Audit Risk Assessment as a Friend

Audit risk assessment can be our closest companion, especially on the off chance that we want productivity, adequacy, and benefit—and who doesn't? This progression, when appropriately performed, guides us—and what can be overlooked. All in all, risk assessment makes proficiency.

Anyway, for what reason do a few auditors (deliberately) maintain a strategic distance from audit risk assessment? Here are two reasons:

  • We don't get it
  • We're creatures of propensity

Time after time, auditors keep doing the same as a year ago (generally alluded to as SALY)- - regardless. It's more agreeable than utilizing risk assessment.

But, imagine a scenario in which SALY is broken or wasteful. It's possibly smarter to assess risk yearly and design our work appropriately (because of current conditions).

Are We Working Backwards?

The familiar proverb "Plan your work, work your arrangement" is valid in audits. Audits, as per guidelines, should stream as follows:

  • Decide the risks of material errors (plan our work)
  • Build up an arrangement to address those risks (plan our work)
  • Perform meaningful techniques (work our arrangement)
  • Issue an opinion (the aftereffect of arranging and working)

Auditors once in a while go directly to step 3. They utilize earlier year audit projects to fulfill step 2. Afterward, before the opinion is given, the documentation for step 1 is made "in light of the fact that we have to."

As such, we work backward. So, is there a better way?

A Better Way to Audit

Audit guidelines—in the risk assessment procedure—call us to do the accompanying:

  • Comprehend the entity and its current environment
  • Comprehend the transaction level controls
  • Utilize planning analytics to recognize risk
  • Perform fraud risk examination
  • Assess risk

While we may not finish these means in a specific order, we need to play out our risk assessment first (1.- 4.) and assess risk afterward.

So, what methods would it be advisable for us to utilize?

Audit Risk Assessment Processes

AU-C 315.06 states that the risk assessment processes should include the following mentioned below:

  • Inquiries of the management, appropriate people inside the internal audit operation (if such operation exists), others inside the element who, in the auditor's expert judgment, may have data that is probably going to help with distinguishing risks of material misquote because of extortion or error
  • Analytical methodology
  • ​Observation and review

We like to consider risk assessment methodology as detective apparatuses used to filter through data and distinguish risk.

Similarly, as a decent detective utilizes fingerprints, lab results, and photos to paint an image, we are doing likewise.

Understand the Entity Along With Its Environment

The audit guidelines necessitate that we comprehend the element and its current circumstance. We like to begin by posing the management this inquiry: "On the off chance that you had a sorcery wand that you could wave over the business and fix one issue, what might it be?"

The appropriate response discloses to us a lot about the entity's risk. There is a need to recognize what the proprietors and the executives think and feel. Each business chief stresses over something. What's more, understanding fear enlightens risk.

Consider risks and dangers to goals. Your customer's feelings of dread mention to you what the destinations are and the dangers.

Understand the Transaction Level Controls

We should accomplish something beyond transaction streams (e.g., receipts are saved in a specific bank account). We have to comprehend the connected controls (e.g., Who enters the receipt in the overall record? Who audits receipt action?).

In this way, as we perform walkthroughs or other risk assessment methodologies, we elevate comprehension of the transaction cycle. However, more critically, we elevate awareness of controls. Without appropriate controls, the risk of material misquotes increases.

Managing Analytics

Utilize planning analytics to focus the light on risks. How? We like to utilize:

  • Long term comparisons of key numbers (at least three years, if conceivable)
  • Key proportions

In building planning analytics, utilize the management's measurements. In the event that specific numbers are critical to the company, they should be to us (the auditors) also—there's an explanation as to why the management or the proprietors are investigating specific numbers so intently. When you read the minutes, request for a sample monthly financial report; at that point, you'll realize what is generally imperative to the management and those accused of administration.

You may contemplate whether you can make planning analytics for first-year businesses. Indeed, you can.

Look at monthly or quarterly numbers. Or on the other hand, you may process and think about proportions (e.g., net revenue) with industry benchmarks.

Once in a while, unexplained varieties in the numbers are extortion signals.

Identify Fraud Risks

In each audit, ask about the presence of theft. In performing walkthroughs, search for control shortcomings that may permit misrepresentation to happen. Inquire as to whether any theft has occurred. In case yes, then how?

Additionally, we should design systems identified with:

  • The management supersede controls, and
  • The purposeful exaggeration of incomes

Same Old Errors

Have you ever seen that a few customers commit similar errors—consistently? Johnny- - the regulator - has worked there throughout the previous twenty years, and he commits similar errors always. Sound recognizable?

In the risk assessment measure, we search for material misquote risk, whether by intention (misrepresentation) or by blunder (mishap).

One approach to recognize possible misquotes because of mistakes is to keep up an outline of the bigger audit passages you've made throughout the most recent three years. If your customer will, in general, commit similar errors, you'll realize where to look.

Conclusion

Now it's time to pull together each step mentioned above.

Proposing to give our regarded customers the best auditing answers, we at JAXA Chartered Accountants are here to direct you and assist you in sorting your business records. Our audit specialists step up to understand your business necessities and give custom-made arrangements viably. They hold industry experience and subsequently put forth an attempt to comprehend the business needs adequately. In case you intend to begin the audit cycle in your business element, do have a word with our specialists. Contact us today. We'd be happy to help.