Last month’s article in our series aimed at enlightening clients about the different aspects of the audit process, focused on materiality and what it means if statements are materially misstated. This month we start looking at the risk assessment process that is followed in identifying risks that might indicate that the financial statements may be materially misstated.
We follow a risk-based audit approach as prescribed in the International Standards on Auditing. This will result in a more cost-efficient audit and increase the likelihood of our detecting misstatements.
The audit risks we identify during our audit are those that could lead to the financial information being misrepresented, and should not be confused with business risks. You, as the director or prescribed officer, should be identifying and addressing business risks on a continuous basis and, ideally, you should be documenting the procedures performed in doing so. There is a possibility that risks could overlap and by working with the risks you have already identified and addressed, we can broaden our understanding of your business.
We perform the following procedures to assess the risk of material misstatement:
These procedures are mainly performed during the planning stage of the audit, but risks can be identified during any stage of the audit, should new information come to our attention.
Risks that we identify can be on financial statement level, meaning most of the line items and cycles in the financial statements are affected. For example: Directors earn lucrative performance bonuses and this could result in a manipulation of profits. This could be done by various means and thus could affect a wide variety of classes of transactions and assertions.
Risks can also be on assertion level for classes of transactions, account balances and disclosures, meaning that only specific line items and cycles are affected.
When we speak of audit assertions we mean the following:
These are the assertions we aim to satisfy during the performance of our audit procedures in order to ultimately express an opinion on a set of audited financial statements that confirms whether these financial statements meet the assertions. If a risk is identified on one of these for a particular account balance, we will perform additional procedures. For example: Debtors are possibly overstated as a result of them not being able to pay due to the current economic conditions (Valuation). We will then perform additional procedures on the testing of the valuation of debtors.
By assessing the risk, we can focus our audit procedures on the sections and cycles within the financial statements where risk of misstatement is deemed to be the highest. This will additionally lead to greater efficiency as a result of reduced time on non-risk areas, as we only need limited procedures to provide assurance in these areas.
If you need any further information about the auditing services that we offer, please contact your relationship director or Christa Swart at email@example.com, tel. 021 840 1600.
 According to the Regulations to the Companies Act, a prescribed officer is anyone who exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company; or regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.