Session 1.3 1

RISK BASED AUDITING

AN OVERVIEW

BYR T I JAIPUR

Session 1.3 2

OVERVIEW OF THE AUDIT PROCESS

Describe Entity

Establish Audit Objective and ScopeDetermine materiality & Assess Risk

The Audit Plan

Develop Audit Program

Review Working Papers and Conclude

Evaluating Audit Results

Audit Report-Short form- Long form-Special Audit Report

Management Letter

PLANNING

EXECUTION

REPORTING

Review, analyse & examine data

Session 1.3 3

Basic Concepts

Importance of knowing entity’s operationsUnderstand significant events, transactions and practices

Understand internal control system

Session 1.3 4

Knowledge is basis for audit

Materiality levelAssessing riskUnderstanding internal controlNature and source of audit evidenceDesigning audit proceduresUnderstanding substance of transactionsAssessing accounting principles

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What is risk ?

Any activity involves risk. Risk is the hazard, chance of adverse consequences and loss associated with the areas of vulnerability / weakness in an organisation which need to be identified to contain damage.

Session 1.3 6

What is audit risk?

The probability that an account balance or class of transactions is materially misstated or contain significant errors.The auditor attempts to limit the risks by assessing internal controls, by deciding the level of sampling and by evaluating the samplesAs 100% testing of transactions is not possible audit risk cannot be totally eliminated.

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Why assess risk ?

The diverse economic and social activities of the state make it imperative for audit to integrate the concept of risk based auditing in its audit planning. In his task of assuring public accountability the auditor must critically evaluate the associated risk.

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The resources available with the department in terms of finances, manpower and time are generally limited vis-à-vis the audit jurisdiction.It is acceptable that audits are performed on test basis,with the resulting risk that we fail to discover all material errors.Therefore we have to assess risk to conduct the audit with an acceptable level of assurance.

Session 1.3 9

Audit has to be selective

Selection must be truly representative of the activities of the auditee organisations.

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Helps in optimising the use of audit resources.Focusing audit efforts in vulnerable areas

Session 1.3 11

The purposes

 Determine risk levels as input to the audit planDetermine which areas are high risk and help develop an efficient audit approach  Assist auditors in their professional judgements

       

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What is risk based audit ?

Risk based auditing is thus an effective way to design an appropriate audit procedure for a given auditing situation.It is an approach to audit whereby limited audit resources are focused on high risk areas and not spread over thinly;thus diluting its effectiveness

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As the risk-based approach considers both internal as well as external information for determining the audit procedures and checks, the overall audit risk is minimized considerably.

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Risk Analysis is an analytical tool for Audit Planning and Execution. This approach focuses on areas, which are likely to generate better assurance instead of sampling and testing a larger, but low risk areas.It insists on restructuring the audit procedures and reorganization of audit work in terms of risk factors. Risk methodologies can thus develop along the existing audit procedures.

Session 1.3 15

Difference between traditional audit and risk based audit

The purpose of audit has not changed but the methodology employed to achieve that purpose is changing profoundly. Features like focus, timeframe, team,information/evidence and output are being redesigned.

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focus

From accounting systems to Operational processesTargeted audit efforts on identified risks

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Timeframe

From Historical to ProspectiveFrom past to near future,important to the users

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Team

Primarily any auditors/accountants To multi- disciplinary experts with specialized knowledge

Session 1.3 19

Information/Evidence

From third party detail testing TO unit based control testingWeaknesses are examined thoroughly

Session 1.3 20

Output

From finance function to operational issuesRecommendations for improvement range deep into operations and become much more valuable

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To sum upBased on the available data and using his judgment the auditor makes an assessment of the factors which could lead to misstatement of facts of occurrence of material errors.He determines sample size and substantive procedures to be performed for audit of different categories of risk areas.

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He carries out audit tests on identified areas to obtain greater assuranceHe evaluates the results.He forms the audit opinion and reports

Session 1.3 23

Thank you