INHERENT RISK

Inherent Risk in Audit



Inherent Risk in Audit

Introduction

Audit risk has three components: inherent risk, the risk associated with control, and the risk of not detecting. The management of risks in a comprehensive framework that implies that the strategies, processes, people, technology and knowledge are aligned to handle all the uncertainty that an organization faces (Bazerman et al 2002). Inherent risk is any exposure to the account balance or class of transactions of any entity that may be significant, either individually or in combination with the distortions of other balances or classes of transactions, in the absence of appropriate internal controls. The analysis of inherent risks is an important tool for the job of the auditor and the quality of service, it includes the diagnosis of these to ensure their possible manifestation (Neuendorf 2001). In this paper, I explore the factors that auditors should consider when assessing inherent risk. This paper also explores how assessment of inherent risk affects the manner in which the audit is conducted.

Discussion

The profound changes taking place today, its complexity and the speed with which they are the roots of uncertainty and risk those organizations face (Glover 1997). Mergers, competitive global and technological advances, deregulation, and new regulations, the increased demand of consumers and residents, the social responsibility and environmental organizations as well as transparency generate increasing risks and complicated new challenges emerging in addition to problems that arise in organizations that operate outside the law or ethical conduct. On the other hand the risks and opportunities go hand in hand, and the key is to determine the potential benefits of these on the risks (Bazerman et al 2002).

In this world of competition, auditing firms have to remain alert round the clock to see whether the concerned firms are conducting their operations within the limits and the sanctity of the provisions of the international standards or not (Ramsey 2007). Currently, the hierarchical structure of most companies is quite complicated, involves several levels of management and is characterised by mutual participation in the capital of each other, which complicates the reporting of information by users and allows the veil in the financial statements. According to an international survey of institutional investors conducted by PricewaterhouseCoopers 62 percent of respondents agreed on the fact that companies are very arbitrarily withdraw their reporting earnings in any given period. Dissatisfaction with users reporting information on financial results and financial position of the company requires further development of methods of accounting and auditing accounting data segments (Bazerman et al 2002). Estimating the risk of audit should be done early in the audit engagement. If the company being audited is very small, the risk-based approach becomes unnecessary, too costly in terms of hours, compared to accounting entries, transactions and internal control procedures to verify. If the business is substantial in size, the risk-based approach is effective since it is better risk areas in the audit of a company, enabling cost savings initially useless.

Nearly all companies that produce an annual report to shareholders are required ...