Auditing The Risk Based Approach Essay

1485 words - 6 pages

Auditing - The Risk-Based ApproachIntroductionRisk, plays a large part in the world of Auditing. Audit risk, represents risk to an auditor or an audit firm, as the risk of paying damages to a client may arise out of negligent work when trying to show a true and fair view of a set of company accounts. All audit work involves some level of risk; this may be because a set of company accounts have been misstated due to error or fraud, or the auditor failed to detect the errors or fraud. In addition, these problems may have occurred due to inadequate sample sizes when determining the level of risk or the auditor failed to use proper auditing policies.To evaluate the level of risk related to specific areas of the audit, three components can help. The first is Inherent risk were environmental factors, (background knowledge of the client and were past audits indicate no difficulties) are concidered against whether or not they would lead to a material error, before considering the 'function of internal controls'. Next is Control risks were the 'system of internal controls' is assessed against the possability of preventing material error, or detecting it in time using internal controls. Last is Detection risk were the auditors procedures may fail to detect a material error not picked up by the internal controls.This report explains why the risk-based approach has become popular with external auditors and how it has been linked to materiality and sampling levels.FindingsRisk Based ApproachThe role of an external audit, no matter what type of organisation it is, is to show a true and fair view of the company accounts and to abide by the auditing standards. Recently the risk-based approach has become as valued as auditing standards and adopted by most. The reason for it becoming so popular is that this audit approach helps the auditor to evaluate the level of risk to a particular area of the audit, i.e. specific accounts and transactions. Consequently, auditors can '...avoid both overauditing and underauditing and can distribute work more evenly throughout the year.' Grobstein and others (1985 p29).Besides, focusing on the level of risk the risk-based method helps to evaluate and build value into the financial reporting process and the clients company. In order to do this the auditor must have an up to date insight of the clients business and activities. This knowledge is gained through the way the client operates their business, management and internal and external environments. The knowledge gathered can help to design the audit program that includes '...the most effective and efficient combination of tests responsive to each client's unique circumstances.' Grobstein and others (1985 p29). For this reason, the risk-based approach is then superior to traditional auditing methods.Although the new system of auditing has become more popular over the years there are obvious advantages and disadvantages that need to be considered. For example, the aims of this...

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