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Thursday, October 7 6:00 PM

7/10/2021
MARY QUENCY C. DEGOMA
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Objectives

Introduction

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 OBJECTIVES x
After studying this chapter, you should be
Objectives able to:

1.Understand the concept of risk-based audit

approach.

2 Know the factors to be considered in

implementing the risk- based audit model
Introduction
3 Understand the limitation in applying the
risk-based audit model

4. Distinguish between risk-based audit and

account-based audit.
Topics
5. Discuss the activities in risk-based
audit.

6. Identify the PSAs to be applied in the

activities in the risk-based audit
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Expected Learning Outcomes
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 INTRODUCTION x
Objectives Risk-based audit approach is an audit that begins
with an assessment of the types and likelihood of
misstatements in account balance and then adjusts the amount
and audit work, to the likelihood of material misstatement
occurring in account balances.

Under this approach, the auditor perform the following:

Introduction
1. Identification of the client’s strategy and the processes
for developing that strategy
2. Examination of the core business process and resource
management
3. Identification for each of the key processes the
objectives, inputs, activities, outputs, systems and
Topics transactions.
4. Assessment of the risks that the processes will not meet
the goals and controls related to those risks.

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Risk Based Audit Approach 6:00 PM

Defined 7/10/2021
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Introduction

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 TOPICS x
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Introduction TOPIC 1 x
1. High-risk activities 2. Existence of large non-routine
This includes operations transactions
• Identified significant related party
Topics or events where a material transactions outside the entity’s normal
misstatement could easily course of business are to be treated as
occur. giving rise to significant risks.
• Routine non-complex transactions that
are subject to systematic processing are
less likely to give rise to significant
risk
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Factors to Consider in 6:00 PM

Implementing the Audit Risk Model 7/10/2021
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Introduction TOPIC 1
3. Matters requiring judgement or
management intervention
Examples would include:
• The assumptions and calculation used by
Topics management in developing major estimates
• Complex calculations or accounting
principles;
• Revenue recognition that is subject to
differing interpretation;
• Where management intervention is
required to specify the accounting
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x
4. Potential for fraud
• The risk of not detecting a material
misstatement resulting from fraud is higher
than the risk of not detecting one
resulting from error
• In evaluating whether significant result
from the identified fraud risk factors and
the possible scenarios and scheme.
• Significant fraud risk may be identified at
any stage in the audit as a result of new
information obtained

Factors to Consider in 6:00 PM

Implementing the Audit Risk Model 7/10/2021
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Introduction TOPIC 2 x
CPA firms in determining their approach to implementing the
audit risk model should consider the following limitations.
Topics
a. Inherit risk is difficult to formally assess.
b. The model treats each risk component as separate and independent
when in fact the components are not dependent.
c. Audit risk is judgmentally determined
d. Audit technology is not so fully developed that each component of
the model can be accurately assessed
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Limitation of the Audit Risk 6:00 PM

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Introduction TOPIC 3 x
Risk-Based Audit Account-Based Audit

Topics
In risk-based audit, the audit team views
all activities in the organization first in
terms of risks to strategies and objectives
and then in terms of management's plans
and processes to mitigate the risk
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In account-based-auditing, auditors
first obtain an understanding of control
and assess control risk for particular
VS types of error and frauds in specific
accounts and cycle

Risk-Based Audit VS. Account- 6:00 PM

Based Audit 7/10/2021
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This phase involves the following activities:
a. Performance of preliminary engagement
Topics activities to decide whether to accept/ continue
Phase I. an audit engagement.
Risk b. Planning the audit to develop an overall
Assessment audit strategy and audit plan.
c. Performance of risk assessment procedures to
identify/assess risk of material misstatement
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The Risk-Based Audit Process 6:00 PM

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This phase involves the following activities:

Topics a. Designing overall responses and further audit

Phase II. procedures to develop appropriate responses to
Risk the assessed risk of material misstatement.
Response b. Implementing responses to assessed risk of
material misstatement to reduce
audit risk to an acceptably low level.
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The Risk-Based Audit Process 6:00 PM

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Introduction TOPIC 4 x

This phase involves the following activities:

Topics a. Evaluating the audit evidence obtained to
Phase III. determine what additional
Reporting audit work (if any) is required.
b. Forming an opinion based on audit findings
and preparing the auditor's
report
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The Risk-Based Audit Process 6:00 PM

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The auditor’s standard reports state "We conducted our audits in accordance
Topics with Philippine Standards on Auditing. Those standards require that we
comply with the ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements."

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The Risk-Based Audit Process 6:00 PM

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Auditing (PSAs) to be Used in the Risk
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–Based Audit Process 7/10/2021
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Auditing PSAs to be Used in the Risk –
Based Audit Process 7/10/2021
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Auditing PSAs to be Used in the Risk –
Based Audit Process 7/10/2021
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Auditing PSAs to be Used in the Risk – 6:00 PM
Based Audit Process 7/10/2021
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Auditing PSAs to be Used in the Risk –
Based Audit Process 7/10/2021
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Auditing PSAs to be Used in the Risk –
Based Audit Process 7/10/2021
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Risk - concept used to express uncertainty about events and/or their outcomes that
could have a material effect on the organization.

The four critical risk that are relevant to conducting an audit are:
Topics 1.Audit Risk - risk that an auditor may give an unqualified opinion on F.S that are
materially misstated.
1. Engagement Risk - economic risk that a CPA firm is exposed to simply because it is
associated with a particular client
2. Financial Reporting Risk - risk that relate directly to the recording of transactions
and the presentation of financial data in an organization’s F.S
3. Business Risk - risk that affect the operations and potential outcomes of
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Understanding the Audit 6:00 PM

Risk Model 7/10/2021
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Introduction TOPIC 6 x
Overview of Risk Elements Affecting an Audit

*Factors Affecting *Factors Affecting Financial

Topics Business Risk Reporting Risk
• Economic climate • Competence and integrity of
• Technological change management
• Competition • Incentive to management to
• Business Volatility misstated F.S
• Geographic location • Complexity of transactions
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Understanding the Audit Risk 6:00 PM

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Introduction TOPIC 6 x
Overview of Risk Elements Affecting an Audit
Audit risk - risk that the auditor fails to find material misstatements in the
client’s financial statement and thereby inappropriately issues an unqualified
Topics opinion on the financial statement
The auditor can control audit risk in two different ways:
1. Avoid audit risk by not accepting certain companies as client ,i.e reduce
engagement risk to zero
2. Set audit risk at a level that the auditor believes will mitigate the
likelihood that the auditor will fail to identify material misstatements
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Understanding the Audit Risk 6:00 PM

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Introduction TOPIC 6 x
Overview of Risk Elements Affecting an Audit

Financial reporting business risk - arise from

Topics issues such as asset impairments, market to market
accounting warranties, pensions, estimates as well as
competence and integrity of management and its incentives
to misstate the financial statement

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Understanding the Audit Risk 6:00 PM

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Introduction TOPIC 7 x
The following considerations are important in integrating the concepts of
materiality and risk in the conduct of a risk-based audit:

Topics 1.Risky areas, of a business must be identified by the auditors to determine

which account balances are more prone to material misstatements.

2.Auditors need to develop approaches and methodologies to allocate overall

assessments of materiality to individual account balances because some
account balances may be more important to users.
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Integration of Concepts of Materiality 6:00 PM

and Risk in a Risk-Based Audit 7/10/2021
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Introduction TOPIC 7 x
3. Audits involve testing or sampling and thus cannot provide absolute (100%) assurance
that the financial statements are free of material misstatements without inordinately
driving up the cost of audits.

Topics 4. Not all clients are worth accepting. Since audits rely on testing and to some extent
on the integrity of management.

5. Competition for clients among audit firms is high.

6. Auditors should understand society's expectations of financial reporting to reduce

audit risk to an acceptably low level and therefore minimize lawsuits that the users
may possibly bring forth.
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Risk in a Risk-Based Audit 7/10/2021
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