The concept of this question needs the explanation of inter-relation between business risk and audit risk, which is automatically, must include the risk analysis as an approach to auditing to overcome with the concern of handling these risks.
Before entering deeper to the business risk and how an auditor can manage and be aware of these risks, lets define and describe some of the terms which is related to this question as follows:-
Business risk is generally defined as the threat posed by an event or action to a business’s ability to achieve its ongoing objective. For commercial organizations, the primary objective is likely to be the maximization of profit, so business risks can be thought of as anything that will prevent the company making as much profit as possible. Since the opposite of huge profits is huge losses, and companies making huge losses will generally go out of business, I could also think of business risks as being forces pushing a company in the direction of going concern problems.
Business risk measurement is the process by which companies determine what risks the business faces for each part of the operation. There are several different methods used to measure the risk of a business. Every company usually has a department that is responsible for determining the risk of every endeavor in which the company engages. Internal audit - is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity's strategic risk management and internal control system. External audit-is a periodic examination of the books of accounts and records of an entity. It is carried out by an independent auditor if the books of account are accurate and comply with established concepts, principles, accounting standards, legal requirements and give a true and fair view of the financial state of the entity. The objective of an Audit of financial statements is to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. Modern internal Auditing- It is growth from operational and compliance auditing the modern internal audit process assessing how the system is functioning determining that risks and exposures are as minimal as perceived evaluating test data for future impact. Risk Management- is a process of thinking systematically about all possible risks, problems or disasters before they happen and setting up procedures that will avoid the risk, or minimize its impact, or cope with its impact. It is basically setting up a process where you can identify the risk and set up a strategy to control or deal with it. Audit Risk- According to the IAASB the term audit risk is defined as risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of material misstatement and detection risk. The business risk started from the organization itself depending on the structures of internal control system and policies implemented by an entity’s Board of directors, audit committee, management and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity’s internal control procedures and the reliability of its financial reporting. If the internal control of the organization is strong it reduces the business risk as well as audit risk for external audit process. A modern internal audit is very important, because the old image still exists to some extent for modern internal auditors. K. H. Spencer Pickett, a noted author in...
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