Students
need to obtain a clear understanding of the business risk approach and of the
difference between business risk and audit risk.
need to obtain a clear understanding of the business risk approach and of the
difference between business risk and audit risk.
There
is still a lack of clarity in the articulation between business risk and audit
risk;
is still a lack of clarity in the articulation between business risk and audit
risk;
however the ideas of inherent risk and control risk have tended to merge
into the large idea of business risk. To simplify the position:
·
Audit risk is the risk the audit firm has to consider
Audit risk is the risk the audit firm has to consider
·
Business risks are the risk facing the client
Business risks are the risk facing the client
The interaction between the two is that audit risk includes assessment
of inherent and control risk, which include some of the components of business
risk.
of inherent and control risk, which include some of the components of business
risk.
Some other key features of the business risk approach are:
·
The direction of the audit is from the risk to the financial statement.
Earlier approaches to auditing tented to start with the financial statements.
The direction of the audit is from the risk to the financial statement.
Earlier approaches to auditing tented to start with the financial statements.
·
The approach is very much a strategic one-much less of the ‘can wages be
paid to non-employees’ and much more of ‘could the client close its factory and
manufacture in china and what are the possible consequences for the company and
its financial statement if it did?’
The approach is very much a strategic one-much less of the ‘can wages be
paid to non-employees’ and much more of ‘could the client close its factory and
manufacture in china and what are the possible consequences for the company and
its financial statement if it did?’
·
Because of the better understanding of the client’s business it is
possible to use analytical review more frequently as a verification of
assertion procedure
Because of the better understanding of the client’s business it is
possible to use analytical review more frequently as a verification of
assertion procedure
·
It is an aid to the client acceptance and continuation procedures (do we
want this client?)
It is an aid to the client acceptance and continuation procedures (do we
want this client?)
·
Going concern consideration (see chapter 24) are a natural by-product of
business risk investigation and separate consideration of going concern may be
unnecessary
Going concern consideration (see chapter 24) are a natural by-product of
business risk investigation and separate consideration of going concern may be
unnecessary
·
The audit needs to be tailor-made and a generalised approach to audits
in neither productive nor economical; however this needs well trained and
experienced staff
The audit needs to be tailor-made and a generalised approach to audits
in neither productive nor economical; however this needs well trained and
experienced staff
·
Auditors need more understanding of business and to that end the larger
firms set up large database of information about the economy and the business
world
Auditors need more understanding of business and to that end the larger
firms set up large database of information about the economy and the business
world
·
The concept implies a continuing relationship with the client rather
than a one-off, each year separate, view.
The concept implies a continuing relationship with the client rather
than a one-off, each year separate, view.
