Assignment on Audit Risk
Added on - 09 Oct 2019
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BLOG: AUDIT RISKWHAT IS AUDIT RISK?
AUDIT RISK13thAugust 2019In the field of accounting and finance audit is something that verifies and inspects the degree ofaccuracy and relevancy. Financial auditing refers to the procedure of examining an individual'sor a company’s financial records for determining whether they are reliable, accurate and madeaccordingly with the applicable rules of accounting including the existing accounting standards,theories, laws, and regulations. Audit work is conducted both internally and externally. Internalauditing is done by a company’s employees i.e. the accounting personnel and executives whereasexternal audit work is conducted by external auditors who come from outside of a company toaudit its accounts i.e. to examine its accounting as well as financial records for providing theirindependent unbiased opinion on such records. According to law, all publicly owned andoperated companies need to audit their periodic financial statements and accounts externally.Internal auditors of a company work for examining financial records and for ensuringimprovement in the internal processes of the company that include operations, governance,internal control, and risk management.During the practice of internal and external auditing, the auditors use to face a number of risksthat are called audit risk. In accounting and auditing, audit risk(s)are the risks which an auditormight issue a non-qualified report as a result of the failure of the auditor to detect the materialmisstatement in the financial statements either due to fraud or error. Audit risk is also called asresidual risk and it indicates the chance for which financial statements of a company will bepublished with a number of materials errors and incorrect financial information even though thathas been examined, reviewed, and approved by an external auditor. This type of risk arises whenan auditor fails to detect accounting fraud or errors while examining a company’s financialstatements. In order to eliminate or reduce the degree of audit risk, auditors need to increase thenumber of audit procedures. The users of a business organisation’s financial statements use torely upon the auditors’ assurance in relation to accuracy and materiality of the reportingcompany’s periodic financial statements and due to this, it is very crucial for auditors to reduce
audit risk at a modest level. The reduction of audit risks stands as an integral part of a company’sand its auditors’ audit functions.Definition and Discussion on Audit RiskAudit risk refers to the risk which makes financial statements of a company materially incorrect,even after auditing and audit opinion’s stating that the statements are correct and free of materialmisstatements. In other words, audit risk stands as a danger that leads to errors or intentionalmiscalculations in accounts and financial statements that will not been caught by auditors beforesuch statements get issued. Itis a risk that a company’s auditor uses to express inappropriateopinion while making his/her individual statement on the accuracy, relevancy, and materiality ofthe reporting company’s financial statements. Audit risk arises at the time when an auditor failsto issue a correct opinion on a reporting company’s financial statements. This kind of risk arisesdue to the accounting errors or fraud, or intended miscalculations of the reporting company in itsfinancial statements that are not been caught by its auditors before these statements are issued.Followings are some of the examples of inappropriately made audit opinions of auditors:Issuing a specific qualified audit opinion regarding the company’s financial statementswhere qualification is not necessaryIssuing an audit report which is not qualified and where qualification is justified inreasonably mannerFailing to emphasise the significant matters in their audit reportProviding a statement or opinion on the periodic financial statements unreasonably due tothe limitation of audit scope.There are three components attached to audit risk such as inherent risk, detection risk, andcontrol risk. This means audit Risk equals to Inherent Risk multiplied by Control Risk andDetection Risk. Audit risk sometimes considered as a result of the several risks that could beencountered while conducting auditing work. In terms of keeping the degree of audit risk