ASSURANCE HIGHLIGHT
3 Components of Assessing Audit Risks
Each year , your audit team conducts a new risk assessment before they begin fieldwork . Why ? Auditors don ’ t want to express an incorrect opinion on the accuracy and integrity of your company ’ s financial statements , as giving the seal of approval on financials containing material misstatements can lead to shareholder lawsuits , increased regulatory attention and more . To better understand your audit team ’ s approach , gain insight into the three main components of an audit risk assessment .
Sometimes , a company ’ s internal controls are not sufficient in preventing or detecting material misstatements . Control risk increases when a business fails to implement and enforce effective internal controls , as well as when third parties override them without the company ’ s knowledge . This risk can be decreased if you implement good internal controls the auditors can test and rely upon .
01 CONTROL RISK
02 INHERENT RISK
This refers to the susceptibility of the financial statements to a material misstatement , whether the company has strong internal controls or not . It is measured on a scale referred to as the spectrum of inherent risk . There is a greater inherent risk in certain transactions and industries ; i . e ., businesses operating in developing countries face a greater threat of corruption and bribery by government officials , no matter the internal controls they implement . It is also increased when accounting transactions are complicated or involve a high degree of judgment and subjectivity .
03 DETECTION RISK
Detection risk is increased when there ’ s a high chance the audit procedures performed will not detect material misstatements . If control risk and inherent risk are high , an auditor may test a bigger sample of transactions to lessen detection risk .
While control risk and inherent risk are the results of an industry and actions , detection risk is managed by the audit team to reduce it to an acceptable level .
Collaboration is Key
Your audit team is not just responsible for attesting to your company ’ s financial statements , they also verify they “ present fairly , in all material respects , in accordance with accounting principles generally accepted in the United States of America ( U . S . GAAP ).”
Unmodified ( or “ clean ”) audit opinions involve detailed audit procedures , like confirming the balances of accounts receivable with customers and conducting test counts of warehouse inventory . Overall , the more demanding the audit team ’ s procedures , the lower the likelihood of failing to detect a material misstatement .
Doeren Mayhew ’ s audit team is here to guide you through your overall audit responsibilities , including discussing changes in business operations , accounting methods and industry conditions that may impact audit risk . We adjust our audit procedures accordingly to ensure your financial statements are prepared with the highest level of quality and efficiency
VIEWPOINTS : ISSUE 1 2024 | 05