Risk based auditing approach is to determining and prioritizing a company’s high-risk areas and planning an audit program to address those risks. In this approach, the main emphasis is on commercial transactions to create the company’s balance sheet. Social and political risks are also included in a planned risk assessment.
Auditors role is crucial in risk-based auditing, as they are responsible for evaluating problems and taking adequate measures to control risks. A risk-based auditing approach starts by assessing the company’s major risks and explaining these risks to the directors or CEOs.
Different Types of Risk Based Audit Approach
The procedure of auditing a firm chooses is crucial, as it will determine the result of the audit. Failure to select the right approach can result in audit error, which could contribute to a bad reputation and heavy fines against the company. Here, we have discussed four different types of audit approaches to address this problem.
System-Based Auditing Approach
Through a system-based auditing approach, the auditors can gain a deeper understanding of the firm’s financial records, analyze the higher-risk areas, and find possible solutions. With this risk-based audit methodology, the company’s whole financial system is examined instead of a specific financial record.
Balance Sheet Approach
In this approach, the auditors’ main focus is the balance sheet accounts instead of the income statement accounts. The auditors evaluate the efficiency of an organization’s internal financial records and lower the risk of account inaccuracy.
Risk Based Approach
This approach is mainly concerned with balance sheet areas that are inaccurate due to fraud or miscalculation resulting from the company’s threats. Through this approach, the auditors can take measures to identify and address the afflicted areas.
Direct Verification Approach
This approach is also known as the substantive procedure approach or vouching approach. With this approach, the auditors’ main aim is to examine large-scale financial transactions and account balances instead of focusing on a specific area of balance sheets. The auditors analyze the documents and receipts of the company’s financial transactions by taking samples and presenting ideas to improve them.
System-based Approach
This risk based approach mainly focuses on the company’s key financial controls and points out areas of risk or possibilities for corrections. The auditors’ main focus is on areas where the system’s target will not be achieved, while the procedure of streamlined testing is implemented in areas of lower risk.
Steps involved in Risk Based Audit Approach
By following the steps of the risk-based audit approach, it becomes easy to adjust according to the company’s particular demands and risk management procedures. Let us look at the risk-based audit approach steps.
Business Understanding
A risk-based auditing process needs to understand the company’s goals and strategies, as well as its struggles so that it can identify high-risk areas. In financial management services, different types of risks are involved, such as functioning issues, defamation, unstable markets, designing new products and services, customer support, performance results, etc.
Engage with the Administration
It is crucial to identify risks and make auditing plans with the help of the company’s administration. With their help, it will be easy for you to run accurate risk analyses for different working areas of the company. The administration also helps the Auditing team be more informed about the risks, which makes the auditing system successful and time-saving.
Initial Risk Analysis
The main objective of an initial risk analysis is to identify the magnitude of risks and the power of measures taken by the company to make it functional. This analysis evaluates the company’s business profile, its management, structural transformations, and the problems within the audit committee. Based on this analysis, the internal auditor rates it as a high-risk or low-risk business process.
Construct an Audit Program
Based on initial analysis, an effective audit program is created. This plan arranges the business procedures in detail and rates them as high or low risk using a Risk Assessment Matrix. During the annual audit risk assessment update, the company’s audit plan should be examined and regulated according to any risk factors that may arise.
Implementation of Audit Program
After deciding on the audit plan, implementation can be initiated. The program is conducted according to the level of risk analysis. It is necessary to discuss the problem with management beforehand in order to present an effective solution.
Risk Based Audit Approach Presentation
After the audit draft is completed, the final risk-based audit approach presentation is given. Which includes the auditor’s risk factors and suggestions and the Management Action Plan. Then, the report is presented to the administration and audit committee for further action.
Risk Based Audit Methodology
There are six different types of risk-based methodologies utilized for an effective audit plan. These techniques are explained below.
SWOT Examination
The phrase SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Internal auditors use this resourceful technique to assess a business’s internal strengths, weaknesses, opportunities, and threats and make an audit plan based on them.
Situation Analysis
With situation analysis, auditors can visualize different types of possible risks and make a plan of action to prevent them. This risk based audit methodology helps the company minimize those risks before they occur.
Historical Data Analysis
This risk based audit methodology involves inspecting past audit discoveries to find any possible risks. With this methodology, the auditors can identify and manage those issues that were ignored in the past.
Brainstorming Ideas
The brainstorming method is also very effective, as it allows all management to come together and discover potential risks of the company. With the help of the free exchange of opinions and various points of view, identifying the risk areas becomes simple.
Standards Comparison/Benchmarking
To identify potential risks, auditors can use benchmarking, which involves comparing the company’s standards with industry benchmarks. They can then tackle weak points and fix issues according to the distinguished benchmarks in their fields.
Risk Identification through Technology
Another best risk based audit methodology is the use of technology. Taking advantage of modern-day technology and data interpretation can help the organization identify and tackle risks. You can analyze a large number of data to detect irregularities and identify risks, helping auditors deeply understand the problem.
Benefits of using Risk Based Audit Methodology
By implementing risk based audit approach steps, the auditors can identify and resolve risks beforehand. Different approaches should be implemented according to the need and level of risks involved. In the following lines, we have discussed the key features of risk-based auditing.
- With an effective audit plan, it becomes easy for the company to adapt to fluctuating circumstances. Making changes to the audit program in compliance with the risk factors can be very helpful in achieving the goals of your company.
- With a risk based audit methodology, the auditors can identify risks accurately and help the management of the company. And take necessary measures to make their performance favorable.
- This approach allows you to make categories of high to low risks; this way, you can effectively allocate your resources to the areas that require the most focus. You can easily design an exclusive risk based audit methodology instead of focusing on an external approach.
Fundamentals of Risk Based Auditing
Five fundamental rules strengthen the risk based audit methodology presented by the International Professional Practices Framework (IPPF).
- Honesty and trustworthiness
- Open-mindedness and objectivity
- Skillfulness and professionalism
- Maintaining privacy
- Communication with the management
Summary
By the end of this article, you must have fully understood the risk based auditing approach and its effectiveness. This methodology helps prevent risks and challenges that may jeopardize a business’s growth and fame. With the help of an effective audit plan, the auditors can plan and help the organization emerge as a successful entity.
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