✅ 1. What Is Risk Assessment in an Audit?

👉 Concept:

Risk assessment is the auditor’s process to identify areas where material misstatements are most likely to occur in the financial
statements.

✅ Purpose:

To focus audit effort where it matters most — saving time and increasing audit effectiveness.

In simple terms: You’re figuring out “Where are we most likely to get screwed?”

✅ 2. Understanding the Audit Risk Model (ARM)

🎯 Concept:

BDO follows the Audit Risk Model, which says:

Audit Risk = Inherent Risk × Control Risk × Detection Risk

Component Definition

Inherent Risk (IR) Risk of misstatement before considering controls.

Control Risk (CR) Risk that client controls fail to prevent or detect a misstatement.

Detection Risk (DR) Risk that we, the auditors, will miss the error.

Interview Talk-Track:

“We start by assessing inherent and control risks to identify where the risk of material misstatement (RMM) is high. Based on
that, we reduce detection risk by designing strong audit procedures.”

✅ 3. Step-by-Step Risk Assessment Process by BDO

🎯 Big Picture Flow:

Entity-level understanding → Assertion-level walkthroughs → Risk identification → Likelihood & Magnitude assessment →
Documentation in APT

✅ Step 1: Client Acceptance & Understanding the Entity (UTE)

Concept:

Before you start any audit, ask: Should we even take this client?
Then get a macro understanding of the company, its operations, industry, IT systems, and internal environment.

Why it matters:
You need to know if this client operates in a high-risk space — say a small manufacturer with thin margins, poor controls, or
heavy reliance on estimates.
✅ Step 2: Understanding Internal Controls (UIC)

Concept:

BDO uses walkthroughs and inquiries to evaluate how well the client’s internal controls are designed and implemented.

Why it matters:
If controls are weak, even simple processes (like cash payments) become high-risk.

Interview Example: “If a small manufacturing company has no segregation of duties in cash disbursement, even a routine
transaction could turn into a fraud risk.”

✅ Step 3: Performing Walkthroughs

Concept:

Pick a sample transaction, follow it from origin to reporting, and identify:

 Where misstatements can happen

 Whether controls exist to prevent those misstatements

BDO looks for:

 Process risks

 Control gaps

 IT system weaknesses

✅ Step 4: Identify Risks of Material Misstatement (RMM)

You identify:

 Entity-Level Risks (ELR): Broad risks, e.g., weak governance, outdated ERP

 Assertion-Level Risks: Specific to accounts like cash, receivables, PPE

You classify each risk based on:

 Likelihood: Is this likely to go wrong?

 Magnitude: If it does, how bad will it be?

✅ 4. Inherent Risk Factors – The Core of the BDO Method

BDO classifies risk using 5 Inherent Risk Factors:

Factor What to Look For

Complexity Is the accounting hard (e.g., hedge accounting)?

Subjectivity Does it rely on estimates/judgment (e.g., PPE valuation)?

Change Did something change this year (e.g., new factory)?

Uncertainty Lack of reliable data or assumptions (e.g., fair value of IP)?

Mgmt. Bias/Fraud Does management have motive and means to manipulate?

BDO’s approach forces the auditor to analyze why a transaction is inherently risky, not just blindly say it is.

✅ Real-World Example (Cash Cycle):

Small company, President has access to cash + signs checks = fraud risk, even if the process is simple.

So, even if:

 Likelihood = Low

 Magnitude = Low

 Fraud risk overrides and elevates the risk to Significant

You’d say in interview:

“Even routine cycles like cash can be high-risk if there’s poor segregation of duties and opportunity for override. That’s why BDO
treats this as a significant risk despite low inherent complexity.”

✅ Real-World Example (PPE Valuation):

Specialized equipment + management estimates = high subjectivity + complexity

Result:

 High likelihood of error

 High magnitude if misstatement happens

 Management bias = low

 No recent change = low

So overall → High RMM → design strong substantive testing (e.g., third-party valuation, impairment analysis)

✅ 5. Documentation in APT (Audit Process Tool)

Every identified risk is documented with:

 Nature of risk (e.g., cash misappropriation)

 Relevant inherent risk factors

 Likelihood & magnitude assessment

In the interview, emphasize BDO’s strong documentation culture via APT — traceable, risk-based, and justifiable.

💡 Final Interview Prep Tips

1. Use real audit examples from your past — cash, PPE, revenue, etc.

2. Always explain why a risk matters — think in terms of impact and likelihood.

3. Link risks directly to audit responses (e.g., increased sample size, third-party confirmations).

4. Be ready to challenge client controls — a skeptical mindset is valued.

5. Mention BDO's use of tools (e.g., APT, RADA) as a strength in structured documentation.

Risk assessment is critical in audit planning. At BDO, we start with understanding the entity using UTE/UIC questionnaires,
walkthroughs, and analytics. We assess inherent risk based on factors like complexity, subjectivity, change, uncertainty, and
management bias. Each risk is rated based on likelihood and magnitude, and documented in APT with clear linkage to FS
assertions. This helps us tailor audit procedures to focus on high-risk areas and reduce overall audit risk.

✅ Interview Question: "Can you explain how you perform risk assessment as part of the audit process?"

Here’s a simple, clear, interview-ready answer with the key BDO process and concepts:

🔹 1. What is Risk Assessment in Audit?

“Risk assessment is the process of identifying and analyzing areas in the financial statements that may be misstated, so we can
focus our audit effort where the risk is higher.”

🔹 2. What Is the Audit Risk Model?

“We use the Audit Risk Model, where:

🔹 3. BDO’s Risk Assessment Process

Say something like:

“At BDO, we follow a structured approach that includes three levels of risk assessment:

1. Entity-Level Risk (ELR)

2. Engagement-Level Risk
 3. Assertion-Level Risk (at the financial statement line-item level)”

🔹 4. How We Perform Risk Assessment Step-by-Step

“We follow these steps to assess risks:”

Step Action Why

1️⃣ Client acceptance / UTE / UIC questionnaires Understand the business and internal controls

2️⃣ Process walkthroughs Identify controls and risks in each cycle

3️⃣ Inquiries with management Gain understanding of operations and key areas

4️⃣ Review Board minutes and external info Spot major events, fraud risks

5️⃣ Preliminary analytics (PAR) Identify unexpected trends or balances

6️⃣ RADA (Risk Assessment Data Analytics) Use data analytics to find unusual patterns

7️⃣ Understand IT systems Know how data flows and where weaknesses may be

🔹 5. Inherent Risk Factors

“Inherent risk is the chance of misstatement before controls. We assess it using these factors:”

Factor Meaning

✅ Complexity Is the accounting technically complex? (e.g. derivatives, leases)

✅ Subjectivity Are judgments or estimates involved? (e.g. fair value, impairment)

✅ Change Any changes in the business or environment? (e.g. mergers, new systems)

✅ Uncertainty Is there lack of precise/verifiable data? (e.g. forecasting, provisions)

✅ Management Bias / Fraud Risk Are there incentives or pressures to manipulate results?

🔹 6. Assessing Likelihood & Magnitude

“For each risk, we assess:

 Likelihood (How likely is a misstatement?)

 Magnitude (If it happens, how big is the impact?) We then classify risks as Low, Moderate, Elevated, or Significant.”

🔹 7. Documenting Risk in APT (BDO’s Audit Platform Tool)

“We document each risk in APT with:

 Related assertions,

 Affected FSAs (financial statement areas),

 Linked inherent risk factors,

 Risk rating and planned response.”

"Sure. We typically assess risk at three levels RISK-

1. Entity-Level Risk – these are risks that affect the whole business, like weak governance, poor controls, or going
concern issues.

2. Engagement-Level Risk – these are specific to our audit, like if it’s the first-year engagement, or if there's a complex
accounting estimate involved.

3. Assertion-Level Risk – these relate to specific account balances or transactions. For example, in inventory, we focus on
the existence and valuation assertions, especially in clients with physical goods spread across locations."