The importance to auditing of concept of audit risks

The importance to auditing of concept of audit risks Messie, Glover, Prawitt Boh, Margaret , 2007 stated that audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. In simple terms, audit risk is the risk that an auditor will issue an unqualified opinion when the financial statements contain material misstatement. ISA 200 states that auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit. (Auditing and Assurance Standard) AAS-6(Revised), Risk Assessments and Internal Controls, identifies the three components of audit risk i.e. inherent risk, control risk and detection risk. Audit risk model: AR = IR x CR x DR. Where, AR= Audit risk (the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated) IR = Inherent risk (the risk that an assertion is susceptible to a material misstatement, assuming there are no related controls) CR = Control risk (the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entitys internal control) DR = Detection risk (the risk that the auditor will not detect a material misstatement that exists in an assertion) The objective in an audit is to limit audit risk to a low level, as judged by the auditor. When conducting an audit, the auditor should consider materiality and its relationship with audit risk. The level of detection risk can be considered only after considering the level of inherent and control risks. While planning an audit, the auditor should keep in mind that the audit risk is to be kept at an acceptably low level. The range, efficiency, efficacy, nature and timing of the procedures performed by the auditor will determine the level (i.e. high or low) of detection risk The major purpose of audit risk models is to help the auditor to obtain a given degree of confidence that the financial statements do not contain a material error. Economic considerations are not explicitly taken into account, and the focus is rather on effective audit risk control. In the second approach, audit decision models are more comprehensive in nature as compared to audit risk models: a broader set of factors are taken into account (such as, audit risk, audit costs, etc.). This type of model may serve as an aid for auditors to identify an efficient and cost effective way by which a suitable level (i.e., cost minimizing) of confidence can be achieved. Audit risk is fundamental to the audit process because auditors cannot and do not attempt to check all transactions. It would be impossible to check all of transactions, and no one would be prepared to pay for the auditors to do so, hence the importances of the riskà ¢Ã¢â€š ¬Ã¢â‚¬Ëœbased approach toward auditing. Traditionally, auditors have used a risk-based approach in order to minimize the chance of giving an inappropriate audit opinion, and audits conducted in accordance with ISAs must follow the risk based approach, which should also help to ensure that audit work is carried out efficiently, using the most effective tests based on the audit risk assessment. Auditors should direct audit work to the key risks (sometimes also described as significant risks), where it is more likely that error in transactions and balances will lead to a material misstatement in the financial statements. It would be inefficient to address insignificant risks in a high level of detail, and whether a risk is classified as a key risk or not is a matter of judgment for the auditor. Generally Accepted Auditing Standards (GAAS) establish a model for carrying out audits that requires auditors to use their judgment in assessing risks and then in deciding what procedures to carry out. This model often is referred to as the audit risk model. The model allows auditors to take a variety of circumstances into account in selecting an audit approach. For example, the model calls for auditors to have an understanding of the clients business and industry, the systems employed to process transactions, the quality of personnel involved in accounting functions, the clients policies and procedures related to the preparation of financial statements, and much more. The model requires auditors to gain an understanding of a companys internal control, and to test the effectiveness of controls if the auditor intends to rely on them when considering the nature, timing and extent of the substantive tests to be carried out. For example, if controls over sales and accounts receivable are strong, the auditor might send a limited number of accounts receivable confirmation requests at an interim date and rely on the controls and certain other tests for updating the accounts to year end. Conversely, if controls are not strong, the auditor might send a larger number of accounts receivable confirmations at year end. The model requires an assessment of the risk of fraud (intentional misstatements of financial statements) in every audit. Based on the auditors assessment of various risks and any tests of controls, the auditor makes judgments about the kinds of evidence (from sources that are internal or external to the clients organization) needed to achieve reasonable assurance. On the one hand, GAAS set forth numerous requirements or matters that auditors should consider; on the other hand, the need to exercise audit judgment is embedded throughout GAAS. Handbook Section 5130, Materiality and Audit Risk in Conducting an Audit. Approved recently by the CICAs Auditing Standard Committee (AuSC), explains the meaning of the terms material misstatement and audit risk and looks at the objective of an audit. In short, while any decision involving materiality, audit risk and the extent of testing will ultimately come down to a question of professional judgments, it is hoped Section 5130, by providing some tools to assist with those judgments, will helps improve audit quality and reduce the potential for under over auditing. Walker, Robert (Mar 1990) answer question why spend time to asses audit risk? The real reason reliance on the internal control is less efficient than reliance

He Steps in the Planning Process Essay

Breaking them down and justifying the reason of choosing them as way to anticipate the outcomes of these goals. It will be a must to make these objectives clear, specific and enough information, such as dividing them in sectors or even in departments in order to guarantee realistic objectives and showing the opportunities as well as problems that the company will experience on the course of the activities. Thirdly will be a the stage of Drawing up Premises. This will involve the establishment of planning assumptions, for instance, to show the future environment in which the plans are expected to occur (Cronje, 2004). The setup of premises is vital to the success of planning and before plans are prepared, the assumptions and conditions need to be defined in order to make possible prediction of the events or activies to happen in the future. Therefor contingency plans may be prepared for alternate possible situations. The fourth stage on this process will be Development of Various Course of Action as a way to establish alternative ways in which the identified goal can be achieved. It is on this step that as a manager will need to outline the tasks required to meet the objective, as each goal should have a task or projects associated with its achievement. Step five will be Evaluating Alternatives, it is important to bear in mind that the alternatives defined in the previous step need to be evaluated in terms of various factors, including the planning premises developed in step 3. Prioritizing goals and tasks is about ordering objectives in terms of their importance, so the tasks deemed most important will theoretically be approached and completed first. Because the prioritizing process may also reflect steps necessary in completing a task or achieving a goal. On the step six, Selecting a Course of Action is the result of step five. A management plan should include a contingency plan if certain aspects of the master plan prove to be unattainable. The selection of course of action can be incorporated into each segment of the planning process or for the plan in its entirety. The seventh step is Formulating Derivative Plans, it involves the drawing up of plans which support the initial plan says Cronje, 2004. Once the goal are defined and planning premises are identified, management can formulate plans and strategies for the accomplishment of desired results. Although the responsibility of planning belongs to the managers, the subordinates ought to be consulted, as the are the one who will curry out the development of the activities. The available alternatives should be evaluated in the light of objectives and planning premises. If the evaluation shows that more than one alternative is equally good, the various alternatives may be combined in action. The last step on this process will be the Budgeting, it serves to establish the resources available for the manger to carry out the plans and achieve organizational goals Cronje, 2004. In order to any business plan be possible we must have financial and human resources projections that will make the goals achievable. Depending on what to achieve a management plan may identify the number of people required how much money will be needed for instance. Reference: Du Toit, Erasmus and

The Quintessential Manual to University of California Essay Samples

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A Critique on Freakonomics, A Nobel by Levitt and Dubner

In Levitt and Dubner’s novel, Freakonomics, they deal with the sensitive subject of abortions in chapter four. During this section, Levitt and Dubner are purposing that the drop of crime is not because of the many popular ideas they address but instead because of abortions becoming legalized. Providing proof to their argument, they list out all the popular ideas that many people believe to be the cause of the drop in crime and then one by one explain why these ideas could not fit into the massive crime drop. After explaining the list of popular ideas, they finally come out and state what their take on the crime drop is and explaining why they believe this explanation instead of the ones listed before (115-145). Levitt and Dubner’s flow of writing and logic are shown very strong in this section and provide an easy and understandable read to the audience. Using this form of writing also creates an easier understanding for when they get to their point and distracts the re ader into taking account of what they say instead of how offensive it is. In the beginning of the chapter Levitt and Dubner tell the story the story of how a Communist dictator of Romania, Nicolae Ceausescu, set a new law to have abortions illegalized and how it ended up backfiring on him (115-117). Opening with a story, they were able to grab the reader’s attention while also proving a point to their main argument about how legalizing or illegalizing a law can create a huge impact on the country. While theShow MoreRelatedPrinciples of Microeconomics Fifth Canadian Edition20085 Words   |  81 PagesNews† feature, argues that in the presence of large fixed costs, the market may insufficiently service customers with unusual preferences. Chapter 17 A new â€Å"In the News† feature, â€Å"Economic Work on ‘Game Theory’ Wins Nobel Prize,† discusses two prominent game theorists who won the Nobel Prize. Current Canadian Information Tables, charts, graphs, and diagrams have been updated to reflect the most current Canadian information available at the time of publication. NEL Copyright 2010 Cengage Learning