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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 such as internal controls, operations,governance, and risk management.During the practice of internal and external auditing, the auditors use to face a number of risksthat are called audit risk. Audit risk(s)are the risks which an auditor might issue a non-qualifiedreport as a result of the failure of the auditor to detect the material misstatement in the financialstatements either due to fraud or error. Audit risk is also called as residual risk and it indicatesthe chance for which financial statements of a company will be published with a number ofmaterials errors and incorrect financial information even though that has been examined,reviewed, and approved by an external auditor. This type of risk arises when an auditor fails todetect accounting fraud or errors while examining a company’s financial statements. In order toeliminate or reduce the degree of audit risk, auditors need to increase the number of auditprocedures. The users of a company’s financial statements use to rely upon the auditors’assurance in relation to accuracy and materiality of the reporting company’s financial statementsand due to this, it is very crucial for auditors to reduce audit risk at a modest level. The reductionof audit risks stands as an integral part of a company’s and 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 the danger that errors or intendedmiscalculations in the financial statements will not be caught by an auditor before they areissued. Itis a risk that a company’s auditor uses to express inappropriate opinion while makinghis/her individual statement on the accuracy, relevancy, and materiality of the reportingcompany’s financial statements. Audit risk arises at the time when an auditor fails to issue acorrect opinion on a reporting company’s financial statements. This kind of risk arises due to theaccounting errors or fraud, or intended miscalculations of the reporting company in its financialstatements that are not been caught by its auditors before these statements are issued. Followingsare some of the examples of inappropriately made audit opinions of auditors:Issuing a specific qualified audit opinion on the financial statements where qualificationis not necessaryIssuing an audit report which is not qualified and where qualification is justified inreasonably mannerFailing to emphasise the significant matters in the company’s audit reportProviding a statement or opinion on a company’s financial statements unreasonably dueto the limitation of audit scope.There are three components of audit risk such as inherent risk, control risk, and detection risk.This means audit Risk equals to Inherent Risk multiplied by Control Risk and Detection Risk. Itsometimes considered as a result of the several risks that could be encountered while conductingauditing work. In terms of keeping the degree of audit risk engagements below the acceptablelimit, auditors need to assess the level of risk pertaining to each component of audit risk.The main purpose behind initiatingaudit workis to eliminate or reduce audit risk, consideringthe three above mentioned audit risk components, to the lowest level by sufficient evidence and