Question

“Risk assessment is the foundation of an audit. For auditors, it is how they come to understand company and
plan their audit procedures to provide the most reliable information for the company and for the users of
financial statements. It will help them to understand what is involved and make the audit risk assessment
procedures run as parallel as possible with companies’ daily responsibilities” From the light of the above
statement, answer the following questions in your opinion:
c) How do the companies identify and analyse risks? and why is it challenging to auditor to apply the concept of
risk assessment? (200 Words)
d) What factors should be considered while conducting risk assessment? (200 Words)

Answer 1

What is risk assessment:

A risk assessment is a systematic examination of a task, job or process that you carry out at work for the purpose of identifying the significant hazards, the risk of someone being harmed and deciding what further control measures you must take to reduce the risk to an acceptable level.

Answer to c

Risk Identification:

Risk identification is the process of determining risks that could potentially prevent the program, enterprise, or investment from achieving its objectives. Organizations are exposed to two major risks namely business risk and finance risk. Business risk arises due to industry, economy, credit and political factors, causing volatility in sales. Finance risk can be either price risk or interest rate risk or foreign exchange risk.

Risk Analysis:

Once the company identifies the risk that could curtail the business growth the next step is analyses the risk and make suitable action to overcome the risk. Therefore risk analysis is the process of identifying and analyzing potential issues that could negatively impact key business initiatives or projects. This process is done in order to help organizations avoid or mitigate those risks. The company has to identify the alternatives for every risk and mitigation plan for overcoming the risk.

Auditors perspective:

Idea of a ‘risk-based’ approach to auditing has been around for at least 20 years, and it is not a difficult concept: it refers to the focus of the audit process on those areas that are most at risk of material misstatement.Determining what constitutes a ‘significant’ risk, a ‘material’ risk and a ‘high-risk area’ are decided by auditors and the management. The auditors conduct sample checks to ensure that risk assessment are carried out.

Factors to be considered in risk assessment:

The various factors that should be kept in mind while conducting risk asses emet are (i) internal factors (ii) external factors. All the factors mentioned below should be discussed in detailed manner.