Audit Procedures: Risk Assessment, Evidence, and Approaches

This report explores the critical elements of auditing, including risk assessment, audit procedures, and audit evidence. It begins by defining risk assessment as the process of identifying areas of a business with a higher likelihood of material misstatement, emphasizing its importance in the audit plan and sample selection. The report then details the significance of audit procedures, highlighting their role in assessing the quality of financial statements and the need for auditor’s written representations. Furthermore, it defines audit evidence as the information collected by an auditor to review internal controls and financial statements, ensuring alignment with accounting standards. Finally, the report examines four essential audit approaches: substantive procedures, balance sheet, system-based, and risk-based approaches, each with distinct methodologies and applications in different audit scenarios.

AUDITING
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Contents
Impact on audit procedure...............................................................................................................3
Risk assessment...........................................................................................................................3
Audit procedure...........................................................................................................................3
Audit evidence.............................................................................................................................3
Audit approaches.............................................................................................................................4
References........................................................................................................................................5
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Impact on audit procedure
There are various factors which can affect the audit procedure conducted by auditors of a
company. In this part of the report, we will discuss three of these factors that are a Risk
assessment, Audit procedures and Audit evidence.
Risk assessment
For preparing an efficient audit plan auditor should risk assessment procedure. Risk assessment
procedure can be defined as a process of identification of areas of business which are more likely
to have material misstatement as compared to other areas. During the effective audit, process
auditor should ensure that more importance is given to these areas. If there is ineffective risk
assessment procedure then there is a chance that auditor may ignore such areas while preparing
samples for examination of books and accounts (Arens et.al, 2012). These areas should be
included in samples so that sample represents the whole population.
Audit procedure
Auditor procedure adopted by an auditor during an audit is dependent upon the quality of
financial statement and books of accounts presented by the client. Auditor prepares audit
procedure to test the quality of financial statement so that he can obtain sufficient audit evidence.
If proper audit procedures are not implemented by auditor then there is a high chance of the
wrong opinion on such financial statements. For this purpose, the auditor should take written
representation from the management that all the transactions are being recorded in books of
accounts.
Audit evidence
Audit evidence can be defined as the information and facts collected by an auditor of a company
to review companies internal control, books of accounts and financial statements. Main objective
collection of audit evidence is to determine whether the financial statements and books of
accounts are in line with applicable regulations and generally accepted accounting standards
(Arens et.al, 2012). If sufficient audit evidence is not collected then there is the risk that audit
opinion doesn’t reflect the true position of the company.
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Audit approaches
Following are the four essential audit approaches-
1. Substantive procedure audit approach
In this audit approach, the main focus of the audit is on transactions of the company instead of
internal control implemented on such statements. This approach is very useful when there is no
internal control or the internal control is very weak. The sample size taken in such approach is
very high as there is a risk of detection risk in such cases.
2. Balance sheet approach
In this approach main focus of the audit is on high-value items of the balance sheet of a
company. Auditor works on an assumption that if values in the balance sheet are correct than the
related transactions will also be correct.
3. System based approach
This approach is just opposite of substantive procedure audit approach. In this approach, the
auditor decides audit sample on the basis of risk assessed on examination of internal controls
implemented by the company. To ensure that internal controls are sufficient, auditor needs to
conduct regressive testing and validation
4. Risk-based approach
This is the most commonly used audit approach in which auditor tries to reduce the work to be
done in audit through identification of high-risk areas of the business organisation. Details
examination is conducted for such areas and other areas are examined leniently (Johnstone et.al,
2013).
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References
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to
conducting a quality audit. Cengage Learning.
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