The most important part of an audit is to identify and assess the audit risk. The flexibility and extensive approach of audit risk make auditors create solid and reliable audits on which both contractors and investors can trust.
Audit Risk
A risk that reveals that financial statements are materially not correct, they are misstated. The main objective of the audit is to reduce the audit risk to its minimum level by using updated techniques and extensive proves. In an audit risk, auditors deliver an inappropriate or incorrect view on the financial statements.
During the audit, financial ledgers and other documents related to it are checked deeply by auditors to find out any error in the documentation. If they find any error, the auditors conduct meetings with the accounting staff of the company and request them to enter correct entries. At the end of the audit, auditors generate an audit report in which they mention that financial statements were misstated or not.
Why audit risk is important?
Audit risk is important because it ensures auditors that audit is carried out correctly and it is incomplete in accordance with the audit laws. An important reason that shows audit risk is very important because the auditors and business entities are investigating to find out whether the financial statements are materially correct. If they identify any errors due to fraud and embezzlement, the company and auditors together create plans to prevent a business from these kind of activities in the future. The audit risk also helps auditors to enhance their accounting skills. It is very beneficial to protect the company and its staff from undesired surprises and also ensures that company financial matters comply with the laws.
Types of audit risk
There are three types of audit risk;
- Control risk: it inquire about the accuracy of the financial statement. Accounting staff of the company can commit mistakes or fraud unintentionally, identifying theses areas is very important to identify control risk.
- Detection risk: this is the risk that identifies that auditing procedures are incapable to identify a material misstatement and then delivered an inappropriate view or opinion about the financial statement. Detection risk happens due to the weak audit planning, it means this risk occurs because of auditors.
- Inherent risk: this risk generates due to the complications and confusion in the financial transactions.
Risk assessment process
It is the duty of the auditors to perform risk assessment methods to ensure that all types of risk assessment are identified. After the identification of the risk auditors perform different tests to identify the size of the risk.
- The auditors examine financial statement
- identify the risk and its size,
- examines which areas have been affected or harmed by the risk
- create plans to evaluate the risk
- record findings and observations
- review assessments and update whenever required
whenever auditors plan for an audit, they must review the levels of risks to calculate the total size of audit risk. If they find that audit risk is at its maximum level, they must find out the ways to reduce it to an acceptable level.
Basically, it is the international accounting framework which consists of rules required to be followed to properly organize and report financial information.
IFRS rules are issued by the London based International Accounting Standards Board (IASB).
IFRS requires businesses to report their financial results and financial position using the same rules, this helps in barring any fraud or manipulation.
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