Audit risk and the concept of materiality

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Audit risk is the risk that an organization specializing in the provision of audit services, which is the ability of poor inspection or inefficiency.Thus, the audit firm takes into account the business risk when working with clients.His example is the probability of not detecting errors in the financial statements of an economic entity.

In addition, the audit risk can be seen from the other side: the potential for the detection of defects and distortions in the accounting documentation, which does not really exist.But in any case, the risk involves mistaken judgment of the auditor in relation to a particular client.

Audit risk can be divided into three main types:

  1. Intraeconomic.
  2. control.
  3. procedural.

first type of risk is called pure.He reveals the probability of an unfavorable situation, that is, errors or omissions in a specific balance sheet item before the direct detection of the internal control bodies.In this regard, the expert in charge of the test, should pay attention to factors such as experience and qualification of the personnel department of accounting, honesty and clarity of assignments of personnel management, relations between superior officers and subordinate to the degree of pressure on the latter.Also, you should take into account the peculiarities of the industry in which the client company operates.

control audit risk - is the likelihood that a customer used method of accounting and reporting is not able to timely detect errors and correct them promptly.That is why the auditor will need to assess rationally introduced a system of accounting and characterize the degree of reliability.Based on data from a valuation activity, the expert will understand, on what the scope of it is worth paying attention to.

procedural audit risk and detection risk involves the ability to use the auditor of methods and techniques that are specific to this situation have been ineffective and are not able to identify any errors.It further may not only undermine the reputation of the audit organization, but also considerable financial losses of the economic entity.Each person must soberly assess the level of poor performance of their work and make every effort to reduce this figure.For example, it may increase the number of audit samples or given to the verification procedure more time than planned.

During the activity, each a specialist performing the verification, should be aware of the fundamental difference of concepts such as materiality and audit risk.The materiality refers to the existence of circumstances that may in one way or another affect the test result, and consequently, on the certificate issued by the economic entity.Before working with a particular client specialist at the planning stage determines the level of materiality, ie the allowable limit value of the distortion.

Audit risk can be assessed in one of two proposed methods:

  1. quantitative.
  2. Evaluation.

first method proposes the use of certain models for the calculation of risk in the value of the coefficient or equivalent.

Evaluation method is called intuitive, it is based on personal experience of the auditor who, having studied the statements as a whole or the individual balance sheet items, concludes risk.The assessment criterion is the division in the unlikely probability and high riskiness of the project.This method is actively used by audit firms in our country.

important to note that none of the above presented way to reduce the level of risk can not bring it to zero.The share of the probability of an unfavorable situation, and making mistakes is always present.And the task of the auditor is considered to be the maximum reduction in the estimated level of risk.