Audit Risk in the Brave New World |
Audit Risk Model |
MR. Asim Khan
The audit risk model has provided a conceptual framework for auditing practice for more than 40 years. Despite practical difficulties in implementation and criticisms of its theoretical foundation, the model has been fairly effective in helping auditors analyze risks and use that analysis to determine the nature, timing, and extent of audit procedures (especially substantive procedures) in audits of financial statements. The audit risk model provides a conceptual framework for the risk assessment standards.
In recent years, auditors have tried to apply the model to audits of internal control, usually performed as parts of integrated audits. An integrated audit is an engagement where the auditor provides an opinion on the financial statements and an opinion on the effectiveness of internal control. It is integrated in the sense that the auditor tries to use some of the same procedures to meet both objectives.
Basically, audit risk is the risk arising from carrying out audit work. It is the risk of the auditor 'suffering loss' as a result of giving an inappropriate audit opinion. The loss may be in the form of damage to the auditor's reputation (and resulting business loss) or in the form of monetary compensation for damages to another person (the client or a third party), or indeed both (reputational and monetary). An auditor gives an inappropriate opinion by, for example, stating that the financial statements show a true and fair view when in fact they do not, or that they do not give a true and fair view when in fact they do. This may arise from:
* not gathering appropriate audit evidence
* being deliberately misled by those providing the evidence who conceal evidence that would have led to a different opinion, or who falsify evidence
* misinterpreting... [continues]
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