Risk-Based Approach to Audit

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Auditors must consider the audit risks associated with audits. It is crucial that they reduce these risks to an acceptable or reasonable level. However, most traditional audit approaches overlook audit risks. While these approaches still cover most risks, they are not suitable for risky audits. For these audits, auditors need to use a different audit approach, known as the risk-based approach.

What is the Risk-Based Approach to Audit?

The risk-based approach to audit is one of the most prevalent audit approaches. This approach focuses on analyzing and managing different risks that can give rise to material misstatements. As mentioned, this audit approach is most useful when used for risky audits. The risk-based approach to audit allows auditors to direct their work toward covering risk areas of the subject matter.

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The risk-based audit approach aims to address the highest priority risks that may exist in an audit engagement. However, that does not imply that auditors completely neglect less risky areas. This approach is usually prevalent in internal auditing. However, external auditors can also employ it for their audits. The most critical stage within the risk-based approach to audit is the planning stage.

How does the Risk-Based Approach to Audit work?

The risk-based approach to audit commences from the audit planning stage. Before employing this approach, auditors need to obtain a fundamental understanding of the client’s high-priority risks. During this approach, auditors need to consider every department and process individually. The risk-based approach seeks to address the top risks for each area and provide insights to the client.

After identifying the risks, auditors must also assess the impact that those risks can have on the subject matter. This process is subjective and requires the auditor’s professional judgement. Auditors need to consider various factors when assessing the impacts of the identified risks. However, the most critical of these will be the effect these risks have on the financial statements.

Once auditors identify and assess the risks, they can plan their audit procedures accordingly. After executing their plan, auditors will have to report to the users. For internal auditors, the process will also involve providing recommendations and following up on those risks. With external audits, the primary objective will be to manage risks and reduce them to an acceptable level.

What are the advantages and disadvantages of the Risk-Based Approach to Audit?

The risk-based approach to audit has several benefits. The most crucial of these is allowing auditors to manage the risks associated with their audit engagements. This approach provides benefits that other traditional audit approaches fail to consider. The risk-based approach to audit primarily applies to internal audits. This approach can also reduce the level of work auditors perform while maintaining audit quality.

Risk-based audits may also have some drawbacks. Most importantly, this approach does not focus on low-risk areas. While it can result in time-saving, it may result in material misstatements being neglected. Risk-based audits are also subjective. If auditors fail to make the correct judgements, the audit quality may get affected. Similarly, this approach may not be suitable for all audit types.

Conclusion

Risk-based audits involve using an audit approach that focuses on high-priority risks. This audit approach is most common within internal audits. The risk-based approach to audit requires auditors to identify and assess the risks that the clients face. Based on that, they can then develop an audit plan. This approach primarily focuses on managing and minimizing audit risks.

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