Understanding Auditor Risk Assessment

This assignment delves into the crucial concept of risk assessment in auditing. It defines different types of risks faced by auditors, such as audit risk, control risk, and inherent risk. The assignment highlights how these risks arise from limited information or misstatements in financial statements. It emphasizes the importance of using methods like materiality assessments, quantitative analysis, and qualitative evaluation to detect these risks effectively. The text stresses the need for auditors to develop comprehensive risk assessment and audit plans before commencing any procedures. Additionally, it underscores the significance of inquiries with management to identify potential fraud or errors within an organization.

AUDITING

ABSTRACT
Audit planning is important because it firstly helps in assessing the risk so that areas
which hold the greatest risk and errors because of which lead to professional liability claims may
get identified. Audit planning is considered as one of the important area at a beginning stage of
audit process in order to ensure that appropriate preparation has been taken for identifying
potential problems and to develop proper coordination of the work. In this report, both
descriptive and critical writing related to Sufficient, appropriate audit evidence, Reasonable
assurance and Free from material misstatement in auditing has been evaluated. Further, critical
examination has been done on if audit planning can still avoid material misstatement due to fraud
or error. Therefore, it can be summarised that audit planning plays an important role for auditor
before starting process of analysing entity's economic action of conducting business operation.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN CONTENT/ ARGUMENT..................................................................................................1
Sufficient, appropriate audit evidence.........................................................................................1
Reasonable assurance..................................................................................................................2
Free from material misstatement.................................................................................................2
Critically examining if audit planning can still avoid material misstatement due to fraud or
error.............................................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Audit planning is considered as one of the important area at a beginning stage of audit
process in order to ensure that appropriate preparation has been taken for identifying potential
problems and to develop proper coordination of the work. Audit planning is important because it
firstly helps in assessing the risk so that areas which hold the greatest risk and errors because of
which lead to professional liability claims may get identified (Gartland, 2017). Audit planning is
effective because it helps auditor to analyse overall objectives of their work such as obtaining
reasonable assurance in order to analyse whether financial statements are free from material
misstatement which may get arise because of fraud or error by which he/she will able to express
the opinion that financial statements are prepared by complying financial reporting framework or
not.
MAIN CONTENT/ ARGUMENT
Sufficient, appropriate audit evidence
According to the views of Yoon, Hoogduin and Zhang (2015) it stated that audit
considered as systematic process of analysing and obtaining appropriate evidence regarding
economic actions and events which performed by the entity during a financial year and to
communicate such information to its users. Thus, in order to give an accurate assurance
regarding financial statement of entity, management of the entity provide an assertion to auditor
and which cannot be trusted until auditor did not collect evidence which confirm its accuracy.
Audit evidence considered any written and electronic information by which auditor will able to
reach on conclusion regarding entity's performance. However, it is important that auditor must
obtain sufficient information which provide reliability of audit evidence so that proper
conclusion will get drawn in order to develop quality in audit report. Such evidence needs to
support the opinion which given in report and on audit's file.
However, on the critical note, it is specified by Glover, Taylor and Wu (2016) that recent
financial statement manipulation which done by Enron, Worldcom etc. Provides that information
which content in financial statement are not always correct and reliable. It indicates clearly that
users did not have to completely rely on documents, receipts or with management representation
which published by the entity. It is necessary that such content on the statements will produce
sufficient and appropriate information. However, there are three types of risk which mainly
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influence appropriate audit evidence which include control, detection and inherent risk. The
auditor must have to perform the test of control for gathering information which support the level
of control risk. Control risk is mainly influenced audit evidence because of inherent limitations
in any type of accounting and internal control system.
On the contrary such risk may get detected if auditor include concept of materiality in its
performance. It is the concept which applied by auditor in both in planning and in performing the
audit where auditor must have to determine materiality in financial statements.
Reasonable assurance
In the views of Christiaanse, Griffioen and Hulstijn (2015) it is stated that reasonable
assurance in audit work mainly influence efficiency of audit risk model. Auditors which contain
official certificate must have higher level of proper and reasonable assurance in their work. Thus,
according to author reasonable assurance is the type of trust which created by auditor in their
work. It also helps in expressing the effectiveness and efficiency of financial reports upon which
users of entity can relay. Mainly auditors use reasonable assurance work in order to provide
judgement on fiscal lists. It helps user's of the entity in order to develop their economic decision
where they will able to decide whether it is good to continue invest on the capital of the
company.
However on the critical note Knechel and Salterio (2016) stated that such concept of
reasonable assurance will directly influence the kind of audit report which submitted by the
auditor. The risk model assumes that there are generally three type of risk which include
inherent, control and detection which mainly influence the reasonable assurance work. Because
of limited information audit risk gets arises and in order to detect such risk auditor must have to
use materiality concept where while doing financial statement audit, he/she has to provide
judgement on content which are material for the users. By analysing the appropriate qualitative
and quantitative information auditor must have to develop the audit report which will provide
useful information to users.
Free from material misstatement
In the views of Brasel and et.al., (2016) it is the responsibility of auditor that the report
which he/she generates will must be free from the material misstatement on which users of the
entity will get relay. It is true that misstatement gets arise from the fraud or error or because of
any kind of difference which reported in financial statements. Here auditors are required to
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obtain proper and sufficient understanding of organisation including its current environment,
internal control system in order to evaluate the risk of misstatement. Auditor responsibility is to
work as whistle-blower where with appropriate comment they have to giver views and share on
economic actions of the entity. It is his/her responsibility to take proper evidences from
management in order to make efficient audit report which is free from the material statements.
However, on the critical note Sutherland (2017) stated that audit risk, control risk and
inherent risk are the one which mainly associate with the concept of materiality. When auditor
are not able to provide sufficient opinion on the financial statement of entity then such risk is
called auditor risk. It is the type of risk which unknowingly gets failed in giving opinion on the
financial statements which are material misstated. When balances of accounts and transactions
contain information which is misstated then such risk is called inherent.
In the views of Zhang and Booker (2018) it is stated that materiality gets detected by
determining performance materiality. It sets particular numerical data which helps and guide
auditor to work efficiently in order to support his/her own opinion. Here auditor must have to
analyse whether the quantitative amount in such misstatement exceeding overall materiality or
not. This nature of allow auditor to evaluate such risk individually by comparing other
misstatement which accumulate during a year. Through qualitative assessment auditor will able
to analyse that whether entity has prepared financial statements in accordance with conceptual
framework or not, or any fraud has been created by entity while disclosing relevant information.
Critically examining if audit planning can still avoid material misstatement due to fraud or error
However, performing materiality concept through quantitative and qualitative assessment
is appropriate in order to avoid misstatement due to fraud or error but there are some other
technique by which an audit planning may still avoid such activities. Here the auditor must have
to assign and supervise personnel taking regarding account of knowledge. He/she has to conduct
proper enquiry from the management because they are in unique position in order to conduct any
kind of fraud activities which is because of their ability in order to manipulate accounting
records. Thus, auditor before starting process must have to test the journal entries which recorded
in journal ledger (Eulerich, Georgi and Schmidt, 2019). He must have to conduct proper enquiry
to individual which included directly or indirectly in business operation of the entity.
Auditor must have to perform quality control for engagement which conducted in
accordance with generally accepted accounting principles. He/she also has to ensure that the
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financial statements are evaluated according to relevant and ethical requirement. Primary
responsibility of auditor is to conduct proper enquiry from those which charged with governance
of company with the use of appropriate benchmark.
CONCLUSION
From the above report it can be summarised that audit planning plays an important role
for auditor before starting process of analysing entity's economic action of conducting business
operation. In this report proper understanding has been provided on effectiveness of audit
planning with the use of appropriate journals and articles. However, it is analysed that in order to
provide honest judgement with sufficient and appropriate information, auditor must have to take
appropriate audit evidence from the management which cannot be trusted until he/she confirms
its accuracy through proper investigation.
In this report, another argument has been developed on reasonable assurance in audit
work in which perception of different author is evaluated. It is concluded that auditors must have
to develop audit report in manner upon which users of the entity will get relay and develop their
economic decision of investing. Reasonable assurance plays a vital role in order to present
effective audit report.
Further, information has been discussed on the types of risk which influence the audit
planning such as auditor risk, control risk and inherent risk and it is analysed from the report that
due to limited information or due to misstatement in financial statements such types of risk gets
obtain and to detect them properly auditor must have to use methods like performing materiality,
quantitative assessment and qualitative assessment. These are the methods which helps auditor to
analyse set of information which influenced by management of entity.
It is also recommended that before starting any audit procedure auditor must have to
develop proper risk assessment and audit planning by which appropriate evidence will get
generated for developing effective comment on the performance of entity. Auditor must have to
conduct proper enquiry to management in order to analyse any kind of fraud or error in the
organisation.
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REFERENCES
Books and Journals
Brasel, K and et.al., 2016. Risk disclosure preceding negative outcomes: The effects of reporting
critical audit matters on judgments of auditor liability. The Accounting Review. 91(5).
pp.1345-1362.
Christiaanse, R., Griffioen, P. and Hulstijn, J., 2015, June. Reliability of Electronic Evidence: an
application for model-based auditing. In Proceedings of the 15th International Conference
on Artificial Intelligence and Law (pp. 43-52). ACM.
Eulerich, M., Georgi, C. and Schmidt, A., 2019. Continuous Auditing and Risk-Based Audit
Planning. Available at SSRN 3330570.
Glover, S.M., Taylor, M.H. and Wu, Y.J., 2016. Current practices and challenges in auditing fair
value measurements and complex estimates: Implications for auditing standards and the
academy. Auditing: A Journal of Practice & Theory. 36(1). pp.63-84.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Sutherland, D.W., 2017. Independent audit report. Newsmonth. 37(3). p.19.
Yoon, K., Hoogduin, L. and Zhang, L., 2015. Big Data as complementary audit
evidence. Accounting Horizons. 29(2). pp.431-438.
Zhang, X. and Booker, Q., 2018. Clarifying Auditors' Responsibility for Fraud: Commercial
Lenders' Perceptions of Changes to the Audit Report. The CPA Journal. 88(3). pp.38-42.
Online
Gartland, D. J., 2017. The importance of audit planning. [Online]. Available through
<https://www.journalofaccountancy.com/issues/2017/sep/importance-of-audit-
planning.html>
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