Risk-based audit is an approach that is related to the concepts of audit risks and materiality. Audit risk is the likelihood that the financial statements are materially misstated after the auditor has determined that the financial statements are free of material misstatements. Materiality is a concept relating to the significance of an amount, transaction, or discrepancy. In this approach, auditors analyze audit risks, sets materiality based on the analyzed audit risks, and then develop audit procedures which mainly focus on the areas of greatest risks. Therefore, audit resources are directly allocated towards the areas of the financial statements that may contain material misstatements, and also audit efforts can be concentrated.
How auditors market the risk-based audit approach
As an auditor, the following aspects are the important ones that need to be addressed to the clients: * Risk-based audit approach is efficient, and time-and-cost saving * Risk-based audit approach enhances audit quality and add value to the client * Risk-based audit approach is designated towards organizations’ own business sectors * Risk-base audit approach is adopted due to its compliance with regulations
The auditors don’t necessarily need to perform detailed audit procedures on all areas of audit. The plan and performance on all areas of audit will be time-consuming, and costs a lot of money. In the risk-based audit approach, programs are designed towards, and resources are allocated to high-risk areas. Thus, it is more efficient and time saving than the normal audit approach in that the auditors need only to plan and design audit programs and procedures on areas previously identified as key risks that could give rise to the materially misstated financial statements. Large sampling and testing of low risk areas can then be saved. Audit resources can therefore be allocated towards high risk areas to achieve a more efficient...