A new approach has been established in regard to audit planning. The risk assessment standards require auditors to:
- Locate, evaluate, and record the risks of material misstatement with the client’s financial statements
- Understand the client’s finances, the client themselves and the financial statements environment
Auditors are required to plan the identification, timing, and degree of audit procedures in response to these risks.
Risk assessment can be difficult to comprehend. Inability to use risk assessment can cause incorrect audit procedures, which can cause statement errors. Those who rely on financial statements that are incorrectly made could cause a liability claim. When risk assessment standards were introduced, the standards presented a new challenge for auditors.
How to assess the risk of material misstatement
The reason audits are performed on financial statements is to show if the financial statements are free of maltreatment. Audits are also executed to reduce audit risk. It is worth noting that the failure to assess vulnerabilities in a statement increases the likelihood of professional liability risk.
Boundaries need to be enacted to meet auditory standards. It is important to understand controls, as well as assessing their design. In doing so, it is important to remember:
- To determine the risk in the entity’s financial statements
- Identify existing controls and their ability to reduce that risk
- Deciding whether the controls in place can prevent and detect material misstatements
It is important to clarify that a lack of internal controls, should be reported to the client. If it is not reported, the client may blame the auditor for not foreseeing an internal control weakness.
How to apply risk assessment standards
Auditors need to know about their clients’ risks and internal control operations. Using this knowledge to respond to the risks is a step most auditors miss. The procedures put in place should confront the risk that is found in the assessment. Regardless of whether or not an audit is in the works if an auditor finds information that could change the level of risk for their clients. It is the auditors’ duty to re-evaluate procedures in place if something like that were to occur. Some common information that could cause an audit re-evaluation are:
- Significant and unexpected adjusted journal entries
- Failed compliance test
- Sudden economic change
- Auditors should keep in mind the importance of staying vigilant during audits.
Keeping proper documentation is crucial in the occurrence that a professional liability suit is introduced. If proper documentation is not recorded, it would be easy to assume that the necessary auditing standard was not followed. To prevent this scenario, an auditor should document all risk assessment procedures, from the initial risk assessment to the creation and execution of the audit procedures.
Auditors need to use the skills, knowledge, and expertise to assess the information they have to avoid a professional liability suit. Look ahead for your clients and keep up to date with auditing standards, know how to use the information you have, and create a plan to reduce risk.