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Overview of Risk Based Audit Process

This document provides an overview of the risk-based audit process in 3 chapters. It discusses the objective of an audit is to obtain reasonable assurance about whether financial statements are free of material misstatement. It also explains the concepts of audit risk, materiality, and the auditor's responsibility. Finally, it describes the three phases of the risk-based audit process: risk assessment, risk response, and reporting.

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Aira Nhaira Mecate
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465 views

Overview of Risk Based Audit Process

This document provides an overview of the risk-based audit process in 3 chapters. It discusses the objective of an audit is to obtain reasonable assurance about whether financial statements are free of material misstatement. It also explains the concepts of audit risk, materiality, and the auditor's responsibility. Finally, it describes the three phases of the risk-based audit process: risk assessment, risk response, and reporting.

Uploaded by

Aira Nhaira Mecate
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 1 –

Overview of the
Risk-based Audit Process
 Auditing
 Objective
 Ethical Requirements
 Conduct & Scope of an Audit of Financial
Statement
 Concepts (Skepticism, Reasonable Assurance,
Audit Risk and Materiality)
 Responsibility for the Financial Statement
 Risk-based Audit Process
 Understanding the Audit Risk Model
 Factors to Consider in Implementing the
Audit Risk Model
 Limitations of Audit Risk Model
Three-party
 Auditing is a systematic process by Relationship
which a competent, independent
person objectively obtains and Appropriate
Subject Matter
evaluates evidence regarding
assertions about economic actions
and events to ascertain the degree Suitable Criteria
of correspondence between those
assertions and established criteria
Assurance Report
and communicating the results to
interested users.
Sufficient
Implied: Appropriate
Evidence
Responsible Party
 To obtain reasonable assurance about whether
the financial statements as a whole are free
from material misstatement, whether due to
fraud or error, thereby enabling the auditor to
express an opinion on whether financial
statements are prepared, in all material
respects in accordance with an applicable
financial reporting framework
 To report on the financial statements, and
communicate as required by the PSAs, in
accordance with the auditor’s findings
 Code of Ethics for Professional Accountants in
the Philippines
 Philippine Standard on Quality Control 1
(PSQC 1)
 Capabilities and competence of personnel –
recruitment and formal trainings
 Independence – independence information

 Maintenance of client relationship –


acceptance and continuance system
 Adherence to regulatory and legal
requirements - monitoring process
 Conduct is governed by Philippine Standard
on Auditing (PSA)

 Scope - refers to the audit procedures deemed


necessary in the circumstances to achieve the
objective of the audit
 Professional Skepticism

 Reasonable Assurance

 Audit Risk and Materiality


 Management

 Auditor
 Begins with an assessment of the types and
likelihood of misstatement in account balances
and then adjusts the amount and type of the
audit work to the likelihood of misstatement
occurring in in account balances

 View all the activities in the organization first


in terms of risks to strategies and objectives,
and then in terms of management’s plans and
processes to mitigate the risk
 Phase I. Risk Assessment
 Performance of preliminary engagement
activities to decide whether to
accept/continue an audit engagement
 Planning the audit to develop an overall
audit strategy and audit plan
 Performance of risk assessment procedures to
identify/assess risk of material misstatement
through understanding the entity
 Phase II. Risk Response
 Designing overall responses and further
audit procedures to develop appropriate
responses to the assessed risk of material
misstatement
 Implementing responses to assessed risk of
material misstatement to reduce audit risk to
an acceptably low level
 Phase III. Reporting
 Evaluating the audit evidence obtained to
determine what additional audit work (if
any) is required.
 Forming an opinion based on audit findings
and preparing the auditor’s report
 Audit Risk – risk that the auditor may give an
unqualified opinion on materially misstated financial
statements
AR = IR x CR x DR
 Engagement Risk –risk due to association with a client
(loss of reputation, inability of the client to pay the
auditor or financial loss because management is not
honest and inhibits the audit process)
 Business Risk – risk that affects the operations and
potential outcomes of organizational activities
 Financial Reporting risk – relates to the recording of
transactions and the presentation of the financial data
in an organization’s financial statement
 Audit Risk – risk that the auditor may give an
unqualified opinion on materially misstated financial
statements
AR = IR x CR x DR
 Engagement Risk –risk due to association with a client
(loss of reputation, inability of the client to pay the
auditor or financial loss because management is not
honest and inhibits the audit process)
 Business Risk – risk that affects the operations and
potential outcomes of organizational activities
 Financial Reporting risk – relates to the recording of
transactions and the presentation of the financial data
in an organization’s financial statement
 High-risk activities

 Existence of large non-routine transactions

 Matters requiring judgment or management


intervention

 Potential for fraud


 Inherent risk is difficult to formally assess

 The model treats each risk component separate and


independent when in fact the components are not
independent

 Audit risk is judgmentally determined

 Audit technology is not so fully developed that each


component of the model can be accurately assessed

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