Identifying and assessing audit risk is a vital part of the audit process. It is crucial to understand to get a more in-depth understanding of what auditing is really about. Our professional auditors at GCS Malta outline the concept of audit risk in the following article.
What is Audit Risk?
The professional definition of audit risk is ‘The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Thus, audit risk is a function of material misstatement and detection risk.’
Audit risk and importance to auditors.
Companies with a vast number of transactions in a statement of comprehensive income and a statement of financial position would be impossible to check all transactions. And no company is willing to finance auditors to review such transactions. Therefore, the risk-based approach toward auditing is essential.
Traditionally, auditors have used a risk-based approach to minimise the chance of giving an inappropriate audit opinion, and audits conducted under ISAs must follow the risk-based approach, which should also help to ensure that audit work is carried out efficiently, using the most effective tests based on the audit risk assessment.
Auditors should direct audit work to the key risks (sometimes also described as significant risks), where it is more likely that errors in transactions and balances will lead to a material misstatement in the financial statements. However, it would be inefficient to address insignificant risks in a high level of detail. Whether a risk is classified as a critical risk or not is a matter of judgment for the auditor.
ISA 315 requirements.
- The auditor shall perform risk assessment procedures to provide a basis for identifying and assessing the risks of material misstatement.
- The auditor is required to obtain an understanding of the entity and its environment, including the entity’s internal control systems.
- The auditor shall identify and assess the risks of material misstatement and determine whether any of the risks identified are, in the auditor’s judgement, significant risks. It is to provide a basis for designing and performing further audit procedures.
- ISA 330 then deals with the required responses to assessed risks.
Conclusion.
The concept of audit risk is of crucial importance to the audit process. An individual in the auditing market or who wished to understand auditing in more depth should follow and understand the ISA 315 requirements. Follow this space for more information on the risk assessment procedures.
Why GCS Malta?
Our auditing team are highly skilled individuals who pay close attention to suck auditing requirements and procedures. So invest in good quality auditing and contact us today.
