Auditing Theory and Practice in Several Factors

Question: Discuss about the Auditing Theory and Practice in Several Factors. Answer: Introduction Audit risk is defined as any form of risk in which an auditor expresses an inappropriate opinion related to the financial statements. The measurement of the audit risk consists of the inherent risk factors, control risk and the detection of the uncertainties prevalent in the financial reports. The most noted form of inappropriate audit reporting is mainly observed in issuing of unqualified audit report in which the qualification has been justified reasonably. The control risks are related to the misstatements that may be corrected, detected or prevented through the internal control mechanism. The control risk assessment may arise due to inappropriate separation of the duties and inappropriate definition of the same. There have been several inherent risk factors observed mainly due to the likelihood of different types of material misstatements, which leads to fraud or error before considering the effectiveness of the internal control system. In several cases, an auditor is unable to d etect the misstatements, which leads to instability in the financial statements (Accounting-simplified.com. 2016). As stated by McNeil, Frey and Embrechts (2015), the study of audit risk is primarily conceptual in nature when the comparison is made with other accounting courses. In order to be more successful in knowing the level of allowable audit risk and auditor should emphasize the learning based on conceptual framework of accounting and apply the auditing concepts different scenarios and circumstances. In order to assess the various types of level of risk which can be accepted the information has been sourced from the International Federation of Accountants and International Accounting Standards Board. The major phases in assessment of the level of audit risk involves clients acceptance in continuance and establishment in terms of the engagement of audit risk, planning of audit and integration of internal control system. An auditor can consider the level of materiality by ensuring the independence in the audit team and fulfillment of the audit engagement requirements (AccountingWEB. 2014). Discussion The purpose of conduction of initial audit is intended to provide a reasonable amount of assurance of the integrity and accuracy of the financial statements. The main purpose is to ascertain the different types of risk involved in preparing a report and provide assurance and avoidance of using excessive time, cost involved in performance which may outweigh the gains from the derived or the results. The external audit is prepared to ensure that the financial statements are free from any errors and material misstatements. It also ensures that the tax authorities can rely on the statements to determine the accuracy during tax returns. The financial institutions reports finalizes and assess the credit risk related to financial position and liquidity. The management of the firm considers exercising risk management procedures and internal control systems with the help of different types of feedback given by external auditors during the course of audit process. Hence, the audit report is de signed to increase the reliance of the users of the audit report has the process has to go through several procedures in the audit process (Accaglobal. 2016). As per the requirements under International Standards on Auditing (ISA) 315, and auditor needs to understand the entity and the environment before accessing the risks related to material misstatement and developing of the responses to address the issues. The assessment of audit risk procedure consists of four processes. A company and the sector in which it operates relate the first process to the understanding of business operations of the firm. The second processes related to the understanding of different types of financial difficulties which can be faced by the firm and also taking into consideration the risks faced by clients. The third stage of the process involves the assessment of various types of material misstatements as a result of business states and the final process in the level of risk assessment involves responding to the risks and addressing it on the basis of a report (Accounting-simplified.com. 2016). According to Geiger, Raghunandan, and Riccardi (2013), the likelihood of financial risk due to the going concern may be related to the past difficulties of the company in procuring external finance and complying with the covenants and the related terms. The risks are also related to the requirement of working capital for maintaining seasonal fluctuations in the demand. In several types of cases that it is been seen that the risks are due to finance facilities which are yet to be renewed but not agreed and moreover the management had not planned for any alternatives for the extension of present facilities. In different cases management has plans to sell the assets in order to overcome the financial difficulties but the values included may not be realized and in case that assets will not be sold or the realized value would be lower, may not be sufficient for the company to overcome the financial difficulties. The going concern risks are also due to the uncertainty and volatility in the future cash flows. Several industries has shown falling the sales due to the credit crisis and although different industries have been affected, the unpredictable nature pertaining to the environment makes it further difficult for the companies to forecast the shortfall in cash and assure adequate availability of cash requirements. In several cases, the entities of financial statements are dependent on the key suppliers and hence situations when supplies face the difficulties supplying of essential raw materials the company needs to spend more time for sourcing of suitable supplier (Pcaobus.org. 2016). According to Sadgrove (2016), in order to focus the fair value factors of the risk assessment is based on the nonexistence of active market, which is required for the valuation purposes. In some cases, the impairment in the noncurrent assets section require additional expertise to assess the high risk valuation in the material misstatements. The auditor also needs to consider different types of strategic risks, which may have a direct impact on the financial statement. This type of strategic risk may be obvious due to the price competition of the goods and it would require higher amount of rent and operating cost in order to cope up with the price competition and create a downward pressure on the prices (Boone, Khurana, and Raman, 2014). In terms of the risk related to systems and controls auditor should consider designing of the effectiveness related to operational controls and address the different types of identified risks parameters. The auditors should be able to ensure that the companys documentation and systems has been properly evaluated and the accounting department has taken into consideration the contingent factors while preparing the financial statements. Some of the other financial risk factors, which need to be considered by preparing audit report, include impairment in the assets, which are held for the purpose of fair value assessment. In several cases, the customers are likely to face difficulties related to finance for high level of receivables and hence it will be the irrecoverable in future. In several cases the impairments of the carrying value as did not affect the financial statement should not be capitalized when considering the non-purchased goodwill amount (Pcaobus.org. 2016). The International Standard on Auditing (ISA) is responsible to identify and make the assessment for different types of material misstatement, which has been stated in the financial statement during an audit report. The assertions are based on the representation by the management of the firms, which may be explicit and used by the auditor for considering the various types of potentiality in terms of the misstatements, which may occur, in the financial report. As per thy is the definition on business risk, it is considered as the risk can arise from significant events and have an adverse effect on the ability to achieve and execute the different strategies and objectives of the business (Nicolaescu 2013). In several cases, the internal control risk has been seen by management and other personnel in achievement of the entities objective and reliability of financial reporting to find the efficiency and effectiveness to comply with the applicable laws and regulations (Ifac.org. 2016). Conclusion Hence, it can be concluded by saying that the level of audit risk feature an auditor is willing to take is based on the significance of the risk. The significance levels of the risks are considered with the material misstatements, which are related to entities risk assessment process for the various types of the identified risk factors. An auditor shall be able to identify the financial risk level based on financial statement level of the company (ISA para A105-A108). The auditor needs to identify the risk level and decide whether the information obtained is related to the purpose of the present audit process. This is because the changes in the control of environment is relevant in obtaining the high standard of audit results and this may require an auditor to make inquiries and perform appropriately to include relevant systems of auditing procedure. In several cases due to the nature of special-purpose, entities in form of corporate trust or partnership entity the audit process may take into consideration several exclusions during assessing material misstatements. The most common type of risk is observed due to non-routine transactions or risk related due to judgmental matters. The non-routine transactions are related to the unusual risks, which may arise either due to the size on nature of the business. 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