Audit risk approach
Audit Risk Introduction
an introduction
The researcher is familiar with the latest research trends in the field of auditing. He finds that there is an increasing focus on the subject of audit risk, and research on how auditors assess these risks, despite the difficulties involved, and apply appropriate audit procedures and tests in order to reach the final risk to the acceptable level. In light of the obligation to apply the recognized auditing standards. The auditor's audit report aims at giving confidence to the financial statements of business enterprises, which means increasing the reliability of the information contained in the financial statements in the decision-making process. The auditing profession is facing a number of challenges by the business community, especially after the collapses The financial situation witnessed by a number of giant companies whose financial statements were reviewed by some audit firms that were classified as adults, especially since these financial collapses occurred despite the issuance of audit reports confirming the fairness of the presentation of the lists Mechanism, to express financial centers and the results of operations of those companies.
Professional liability requires the auditor to exercise professional discretion and be aware of the possibility of significant and effective fraud and fraudulent deviations, notwithstanding the prior experience of the auditor, with respect to the honesty and integrity of the client's management under review, Access to information used to identify the risks of significant and significant misstatements resulting from accounting practices that lead to the preparation of misleading financial statements, as well as to identify and assess the risks of significant and significant deviations resulting from such practices at the level of The audited financial statements, on the understanding that the auditor's report, including the professional opinion, provides for the fairness of the presentation of the financial statements as a whole.
Nature audit risk
The risk involved in the audit process is an important factor to be taken into account by the auditor, whether in his or her choice of the client, when planning the audit process, when designing appropriate audit procedures, and in compiling and evaluating audit evidence and evidence in order to express objective substantive opinion in fairness Presentation of audited financial statements as a unit. The audit risk issue can not be ignored as a key input to the auditor's professional performance as required by the audit criteria. The auditor's determination of the degree of risk in the audit process is undoubtedly a prerequisite for determining the scope and scope of the audit. Its tests of operations and accounts, which are in its entirety the audited financial statements, the determination of additional procedures to be performed and the quantity and quality of evidence The evidence required to obtain it in order to achieve the accuracy of the audit process and to confirm the fairness of the presentation of the audited financial statements or not, not to mention that these procedures reduce the costs of the audit process on the one hand, and protects the auditor from legal accountability on the other hand, which is what Requires the auditor to achieve efficiency and effectiveness in the audit process.
The risk of auditing is a fait accompli that threatens the auditor, whether it applies a detailed review or is based on a test review. It is also a relative concept, which is related to a field audit standard, which requires the auditor to gather adequate, appropriate and convincing evidence to support his opinion. A prudent auditor should avoid or at least minimize the risk of such risks by doing the utmost professional care, with a firm commitment to effectively apply audit standards.
The auditor is a researcher and a rapporteur who prepares the financial statements and works in an environment of uncertainty or risk. He must address every section that reduces the degree of uncertainty and leads to a degree of certainty or a little below with respect to the impartial substantive opinion of Justice Presentation of audited financial statements. It is possible to say that as long as there are audited financial statements, those who review and express their professional opinion in their fairness should be fully aware of the risk assessment problems related to this work, prepare to accept a degree of risk, and plan the audit, To the extent possible, to meet the expectations of the users of the financial statements with respect to the fairness of presentation of these statements and their representation of the outcome of the activity and the financial position of the entity.
Risk levels in the audit process
Assessing the level of risk in the audit process is the key to controlling this risk. Note that the audit risk that can be attached to the auditor is an economic decision that needs to be analyzed in terms of cost and return. The potential returns from accepting a high risk review level are savings on the cost of a review process And the potential increase in audit fees resulting from the acceptance of new audit clients. The potential costs of accepting a high risk review level are the legal penalties that the audit office may face, as well as the decrease in the This may mean losing customers.
There are three levels of risk in the audit process that the auditor must consider when performing due diligence and may be expressed in a specific way (as a percentage or probability) or expressed as an unspecified range between a minimum and a maximum using a particular confidence factor. The following is a statement of these levels.
1. Planned Risk:
This is the risk that is determined before examining and evaluating the internal control system and performing the audit procedures. This risk is only a first estimate of the possibility of a material error in the audited financial statements.
Final Risk Final Risk:
Are those that reflect the final level of risk in the audit process that the auditor is able to perform after all the analytical and detailed review procedures have been completed.
3. Actual risk: Actual Risk
It expresses the true level of risk that the auditor does not know, even after the completion of all audit procedures, and issuing the audit report, where this level exists only in theory.
The audit risk can be divided in terms of level to the following:
1. Normal risk of audit Normal audit risk:
The normal risk exists in all types of reviews. Despite the strength of the evidence and the professional attention of the auditor, there may always be the possibility of an error or fraud that is not discovered. Indicators indicating a level of risk are considered as follows:
- The prior experience of the auditor in reviewing the client's facility has shown a normal level of risk.
- Integration and compatibility between the management and employees of the client's establishment.
- The accounting system of the client's establishment should be well designed and have effective internal control.
- Lack of funding problems in the client's premises.
- The customer's business is stable and its activities are not subject to sudden changes or fluctuations.
- The members of the board of directors or managers are connected to the establishment and perform the functions of supervision and leadership effectively.
- The management of the establishment includes qualified managers in addition to an effective audit committee.
2. Unusual risks Higher than normal audit risk:
This unusual level of risk is found in some reviews due to the existence of specific conditions of the entity under review and indicators indicating a level of risk is considered unusual:
- The prior experience of the auditor in reviewing the client's operations has shown an extraordinary level of risk.
- The future plans of the client's establishment include issuing additional shares or stock splitting or buying treasury shares.
- Having a large leverage.
- Problems of liquidity.
- The presence of weak management is not qualified.
- There is a weakness in the internal control system, or in one of its aspects.
- Changes in the assets of the audited entity or in the applicable regulatory or administrative system.
- The presence of a rapid turnover rate of employment in the establishment.
- Changes in accounting procedures and policies.
- Dependence on a single product or a limited group of customers or suppliers.
- The presence of a large modern investment in a transaction or products.
- The existence of problems specific to the nature of the activity of the client's establishment, as in the difficulty of stock inventory or evaluation problems.
- Entering the establishment in judicial disputes.
Definition of risk in the audit process
First: In terms of its causes:
The risk in the audit process is defined as the probability that audit procedures will fail to detect significant (non-material) errors that may occur and remain unobserved - and the auditor should consider in the planning of the audit the coordination between the risk minimization objective in the audit process and the objective of achieving A surplus of the fees received after covering the expenses of the audit. Therefore, the auditor should avoid increasing procedures and audits in less complex and low-risk cases, or reduce procedures and audits in complex and high-risk situations.
It is noted that in the definition of audit risk from the perspective of the underlying causes, the overall audit risk and the audit risk are differentiated at the account level or the individual audit risk as follows:
Risk of audit at the account level or item risk of overall review
- The possibility of the auditor failing to confirm the correct balance of the account or item under review.
- is considered part of the overall audit risk.
- It may be due to a material error in the account balance, and the auditor fails to disclose it.
- The level of this risk depends on the relative importance of the account balance or the item under review. - The probability of the auditor failing to give a correct report on the fairness of the financial statements in expressing the financial position and the results of operations.
- The sum of the total audit risk at the level of accounts or items under review.
- It may be the result of a group of significant or material errors in the audited financial statements that are not disclosed.
- It may be due to the auditor's inability to ensure that the audited entity is applying accounting policies or principles that are generally accepted and consistent with their application from time to time.
Second: In terms of its results:
The risk in the audit process is defined as the possibility that the Office of the Auditor would be exposed to direct losses as a result of compensating the users of the audited entity's financial statements for damage caused by an improper judgment of the fairness of the audited financial statements as well as for the indirect losses of its location and reputation The customer in particular, and the business community in general. The risk in the audit process may also be defined as damage to the auditor's office as a result of an erroneous opinion on the fairness of the presentation of the audited financial statements. The damage is in the form of cash losses to the customer or the third party as compensation for the negligence of the office in the usual professional care, Losses may be non-monetary, such as the loss of the Office of the Auditor for professional reputation.
The impact of risk in the audit process on the auditor's report
Since the auditor, relying on his or her choice of examination, for accounting books and records, and documents supporting the occurrence of financial transactions, this leaves insufficient information, which leads, of course, to some kind of uncertainty and uncertainty, which leads the auditor to make decisions , Or reaching conclusions that may be wrong. It can be said that these erroneous decisions or conclusions take two distinct directions:
The financial statements may be presented fairly and in a manner that reflects the financial position and results of operations and is consistent with the generally accepted accounting principles. However, the auditor finds that the audit results are incorrect, Issued an unconsolidated report on these financial statements.
2. Financial statements may not be presented fairly, or are not expressed in terms of financial position and results of operations, and / or inconsistent with accounting principles that have general acceptance. However, That these lists are correct and therefore issues a clean (unaudited) report on these financial statements. The first trend is called Alpha Risk, while the second trend is called Beta Risk. Both of these risks are present, even when using the statistical sampling method in the performance of the review and examination method.
It is noted that these two risks are the final outcome of the components of audit risk, which refer to one of these two risks (the final danger). Some report that these risks are not accurately measured, which in some cases leads the auditor to exert too little professional effort to control the risk in the audit process. In other cases, the auditor performs too much professional effort.
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