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AT Overview of Risk Based Audit Approach

The document outlines the risk-based audit approach, which focuses on assessing the likelihood of material misstatements in financial statements and adjusting audit procedures accordingly. It details the phases of the audit process, including risk assessment, risk response, and conclusion/reporting, while emphasizing the importance of understanding business risks and the auditor's role in evaluating and mitigating these risks. Additionally, it discusses relevant auditing standards and specific audit procedures used to gather evidence and form opinions on financial statements.

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Elise
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17 views36 pages

AT Overview of Risk Based Audit Approach

The document outlines the risk-based audit approach, which focuses on assessing the likelihood of material misstatements in financial statements and adjusting audit procedures accordingly. It details the phases of the audit process, including risk assessment, risk response, and conclusion/reporting, while emphasizing the importance of understanding business risks and the auditor's role in evaluating and mitigating these risks. Additionally, it discusses relevant auditing standards and specific audit procedures used to gather evidence and form opinions on financial statements.

Uploaded by

Elise
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1

OVERVIEW OF RISK-BASED
AUDIT APPROACH

FRANCIS H. VILLAMIN
2
INTRODUCTION TO AUDITING

• Auditing is a systematic process of objectively


obtaining and evaluating evidence regarding
selected assertions about economic actions and
events to ascertain the degree of
correspondence between those assertions and
established criteria and communicating the
results to interested users.
3 ASSERTIONS
CLASSES OF TRANSACTIONS

Occurrence Completeness

Cutoff Classification Accuracy


4 ASSERTIONS
ACCOUNT BALANCES

Existence Completeness

Rights and Valuation and


Obligations allocation
5 ASSERTIONS
PRESENTATION AND DISCLOSURE

Accuracy and
Completeness
valuation

Occurrence and
Classification and
Rights and
understandability
Obligations
6 AUDIT APPROACHES

Substantive procedures
Approach

Balance sheet Approach

Systems-based Approach

Risk-based Approach
7
RISK-BASED AUDIT APPROACH

• This is an audit approach that begins with


an assessment of the types and likelihood
of misstatements in an account balance
and then adjusts the amount and type of
audit work to the likelihood of material
misstatements in account balances.
8
AUDIT PROCESS

High-risk areas

Low-risk areas
9
RISK-BASED AUDIT APPROACH

• Identify areas of financial statements


whether there is higher risk of material
misstatement and concentrate efforts in
those areas, caused by either high
inherent or control risk.
• Identify low-risk areas in which to
perform less extensive procedures.
10
RISK-BASED AUDIT APPROACH

Objective:
To obtain reasonable assurance that no
material misstatements whether caused by
fraud or error occur in financial statements.
11 RISK-BASED APPROACH

I. Risk Assessment

II. Risk Response

III. Conclusion and Reporting


12

RISK BASED AUDIT PROCESS

Phase I – Risk Assessment


1. Preliminary Engagement Activities
2. Audit Planning
Phase II – Risk Response
3. Tests of Control or Compliance Tests
4. Substantive Tests or Direct Tests
13

RISK BASED AUDIT PROCESS

Phase III – Conclusion and Reporting


5. Completing the Audit Engagement
6. Issuance of Audit Opinion
7. Post Audit Responsibilities
14

RELEVANT STANDARDS
300 Planning an Audit of Financial Statements

315 Identifying and Assessing the Risks of Material Misstatements


(Revised) Through Understanding the Entity and Its Environment

320 Materiality in Planning and Performing an Audit

330 The Auditor’s Responses to Assessed Risks


15
PSA 300 – PLANNING AN
AUDIT OF FS

Establishment of Overall Audit Strategy


• Nature, Timing and Extent of Examination

Development of detailed Audit Plan


• Audit Program
• Time Budget Strategy
16
PREDOMINANTLY
SUBSTANTIVE APPROACH

❑ Nature - Extensive
❑ Timing - Current/Interim and
Year-end
❑ Extent - More
LOWER CONTROL RISK
17
APPROACH
(COMBINATION APPROACH)

❑ Nature - Restricted
❑ Timing - Current/Interim
❑ Extent - Few
18

2 PHASES OF PLANNING

A. Preliminary Engagement Activities


B. Planning Proper
19
PRELIMINARY ENGAGEMENT
ACTIVITIES

• Perform procedures regarding the continuance of


the client relationship and the specific audit
engagement.
• Evaluate compliance with ethical requirements,
including independence.
• Establish an understanding of the terms of the
engagement.
20
PURPOSES OF PRELIMINARY
ENGAGEMENT ACTIVITIES

• Ensure that the auditor has considered any events


or circumstances that may adversely affect the
auditor’s ability to plan.
• Perform the audit engagement to reduce audit
risk to an acceptably low level.
21

PLANNING PROPER
• The auditor should establish the overall audit
strategy for the audit.
• The auditor should develop a detailed audit plan for
the audit in order to reduce the audit risk to an
acceptably low level.
22

STEPS IN AUDIT PLANNING

1. Obtaining an understanding of the entity and its


environment.
2. Performing analytical procedures.
3. Consideration of fraud in audit planning.
4. Identifying and assessing the risk of material
misstatements through understanding the entity
and its environment.
23

BUSINESS RISKS
• Financial risks – these are risks arising from the
company’s financial activities or the financial
consequences of operations.
• Operational risks – these are risks arising from
the operations of the business.
• Compliance risks – these are risks arising from
noncompliance with laws, regulations, policies,
procedures and contracts.
24
IDENTIFYING AND ASSESSING
RISKS

• The first step involves obtaining an


understanding of the entity and assessing the
level of business risks. Auditors then consider
the effect these factors could have on the
risk of material misstatements at the
financial statement level.
25 RISKS OF MATERIALLY
MISSTATING THE FS

• Inherent risk is the possibility of material


misstatement of an assertion before
considering the client’s internal control.
26
RISKS OF MATERIALLY
MISSTATING THE FS

• Control risk is the risk that a material


misstatement could occur in a relevant
assertion and not be prevented or detected on
a timely basis by the client’s internal control.
AUDITOR’S PROCEDURES
27
MAY NOT BE ABLE TO DETECT
THE RMM
• Detection risk is the risk that the
auditor will fail to detect a material
misstatement that exists in relevant
assertion.
28
MEASURING AUDIT RISK

AR = IR x CR x DR
• Audit Risk is the risk that the auditor gives an inappropriate
audit opinion when the financial statements are materially
misstated.
• In setting the desired audit risk, auditors seek an
appropriate balance between the costs of an incorrect audit
opinion and the costs of performing the additional
procedures necessary to reduce audit risk.
29
AUDIT RISK MODEL

Auditor’s assessment of control risk

High Medium Low

High Lowest Lower Medium


Auditor’s
assessment of
inherent risk
Medium Lower Medium Higher

Low Medium Higher Highest


30
RISK RESPONSE

• The objective of the auditor is to obtain


sufficient appropriate audit evidence
regarding the assessed risks of material
misstatement, through designing and
implementing appropriate responses to
those risks.
31 RISK RESPONSE

• Test the operating


Tests of Control effectiveness of controls
in preventing or
detecting and correcting
material misstatements
• Detect material
Substantive misstatements at the
Tests assertion level.
32
SPECIFIC AUDIT PROCEDURES
• Analytical Procedures
• Confirmation
• Recalculation
• Reperformance
• Inquiry
• Inspection of Records and Documents
33
SPECIFIC AUDIT PROCEDURES

• Inspection of Tangible Assets


• Observation
34 CONCLUSION AND
REPORTING

1. To form an opinion on the financial


statements based on evaluation of the
conclusions drawn from audit evidence
obtained.
2. To express clearly that opinion through a
written report that also describes the
basis for that opinion.
35
TYPES OF OPINION

• Unmodified (Standard Unqualified


Opinion)
• Modified with a Change of Opinion
1. Qualified or “Except for”
2. Disclaimer of Opinion
3. Adverse
36

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