What is the most important element of the audit risk model?
This blog post is the third in a series on risk assessment, a significant audit quality issue. View the first blog post here and the second here. Show
The audit risk model is the foundation of any audit. This might seem like CPA 101, but are you correctly applying it to your engagements? In doing so, your first consideration is your client’s risks of material misstatement (RMM), which is made up of inherent risk and control risk. As a reminder, inherent risk is the risk of material misstatement assuming no related controls, while control risk is the risk that your client’s controls won’t prevent or detect and correct a material misstatement. So how do you apply this to your audit? Understand your client and its environmentBecause RMM drives your audit planning and procedures, your first step in applying the audit risk model is to obtain an understanding of your client and its environment. You should consider the nature of your client’s business, external factors that impact it, and how the organization measures and reviews its financial performance. This includes:
With each of these areas, make sure to document the steps you took to gain an understanding, any changes to your understanding of the client from previous years as well as risks identified and whether they are significant. Understand your client’s internal controlYour next step in applying the audit risk model is to obtain an understanding of your client’s internal control. You’ll want to know what controls (either individually or in combination) are in place, if they are designed properly to meet their objective, and if they have been implemented. Make sure to consider the following:
Again, you’ll want to document your understanding of your client’s internal control, including the control environment. Then document the steps you took to understand it, any changes over the previous period, and all identified risks. Use RMM to drive detection riskBased upon your assessment of RMM, you’ll determine the nature, timing, and extent of your audit procedures. For example, if you determine that your client has low inherent and control risks at the assertion level, you might accept detection risk at high and thus use less rigorous substantive tests (i.e., analytical procedures or tests of details). On the other hand, if your client’s inherent and control risks are moderate to high, you would plan more rigorous substantive tests in order to obtain more persuasive audit evidence about the assertion as part of your audit. The key for using RMM to drive detection risk is to remember that the nature, timing, and extent of further audit procedures planned needs to be responsive to the RMM identified. The audit risk model is the basis for any audit. For a step-by-step guide to help you apply it to your engagements, download our free Audit Risk Assessment Tool, listen to the latest podcast episode from the Small Firm Philosophies series on risk assessment, and check out other resources on the AICPA risk assessment resources page. What is the importance of audit risk model?Why is this important for you? Organizations that understand the Audit Risk Model can improve their internal controls and afford greater detection risk, which decreases the auditor's required effort and overall cost.
What is the most important part of an audit?Evaluating internal controls
This is arguably the most important part of an audit and where many organizations can find a significant amount of value from having an audit conducted.
What is the most important stage of an audit?The most important phase of an audit cycle is planning, where the audit is planned as to the aim of the audit and what criteria are best suited to arrive at the aim. Auditors. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.
Which risk is one of the three components of audit risk?From an auditor's viewpoint, the three components of audit risk are inherent risk, control risk and detection risk.
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