Factors to Consider When Determining the Level of Acceptable Audit Ris

Question: Discuss about the Factors to Consider When Determining the Level of Acceptable Audit Risk. Answer: Introduction Audit risks affects solicitation of GAAS particularly ideals of reporting and is usually reproduced in assessors normal reports (Krishnamoorthy, Wright and Cohen 2002). Therefore, audit risk amongst other matters should be taken into consideration in defining the timing, extent and nature of the audit techniques and in assessing consequences of such events. Generally, audit risk is usually viewed as peril which auditor might innocently miss to properly adjust his or her view on financial reports which are usually substantially misstated (Low 2004). Auditors need to take into account of the audit risk both in designing the auditing procedures and planning the audit as well as in assessing whether financial statement are presented in material respects, fairly and in conformity with the GAAP. In essence, auditors have to take into account of the audit risk in first circumstances in order to get adequate competent evidential substance on which to correctly assess for the financial statem ents (Novyarni 2014). Basically, while conducting an audit, the auditor goals to decrease audit risk in their work to relatively low stage. With these considerations, this essay aims to present some of the factors to be considered while defining level of audit risk when conducting his or her audit work. Factorstobe ConsideredinDeterminingthe Most SatisfactoryAuditRisk To start with, an auditor should take into account of the nature of the firm and accounting policies followed (Low 2004). This comprises of having a greater understanding of legal structure of an organization, ownership, governance structure as well as primary sources of funds used by the firm. Interestingly, complex ownership and governance structure with several locations and subsidiaries is said to increase audit risk (Vander Bauwhede, 2001). Therefore, understanding the nature of an organization could be very crucial and could comprise of understanding accounting policies applied and selected to its financial reports. Hence, the auditor should take into account of the accounting policies applied in an organization and should check whether these policies are in consistent with all applicable financial reporting outlines. Secondly, the auditor should take into consideration of the industry where a company operates in, regulatory as well as other external features including all applicable financial reporting structure for the company. This implies having a greater understanding of the main sector in which an organization operates, including level of rivalry, nature of relationship between the firm, customers and suppliers as well as the level of technological advancement employed in the industry (Carnaghan 2006). An industry in which the company operates could have some specific regulations and laws that impact on its operations. Thus, the auditor should take into consideration of the wider economic aspect like volatility and level of interest rates as well as exchange rates. These aspects are important due to their potential effect on the organizations financial statements and their effect on planning of auditing work (Hahn 2008). For instance, if a specific customer operates in highly regulated secto r, it might be worth taking into account of the inclusion in audit team of individuals with particular knowledge or experience of these regulations. Such regulations could comprise of financial reporting structure like evaluating whether an organization utilizes international or local financial reporting standards. The auditor should also take into account of the strategies, objectives as well as related business risks. They should evaluate whether the management has defined business objective as well as the general tactics for the firm. These tactics comprises of operational techniques that the management wish in meeting distinct ideas. For instance, an organization objective might be maximization of the market share while the tactic to accomplish such objective could be prelaunch new products or brands on yearly basis. On the other hand, the auditor should take consider related business risks. These are aspects which could hinder the firm from accomplishing the set objectives such as launching a new product which has limited demand in the market (Johnstone, Gramling and Rittenberg 2013). These business risks would have relatively greater influence on the financial statements of an organization; hence, the need for the auditors to conduct business risk evaluation as they plan for their auditin g work. Further, the auditor should consider measurement as well as review of an organizations financial performance. In this case, the auditor should look at the measurement and financial performance of an organization in order to gain some understanding of performance measures that the organizations management and other stakeholders might consider important to them as they evaluate the firm performance (Hogan and Wilkins 2008). Performance measures could create some pressure on an organizations management in taking action aimed at improving their financial statements via deliberate misstatement. For instance, bonus payables to organizations management on the basis of the revenue growth could produce some pressure for the companys sales to be overstated. Therefore, an auditor should try to gain a greater understanding of an organizations financial as well as non-financial main performance signs, budgets, segmental information as well as targets. The auditor should also take into account of the internal control in an organization (Low 2004). Here, the auditor should try to gain some understanding of an organizations internal control by being able to consider how diverse factors of the internal control in an organization could affect their audit work (Johnstone 2000). In essence, internal control comprises of organizations risk assessment processes, control environment, control activities, monitoring of the controls as well as information systems (Gavin, Hicks and Scheiner 1987). Basically, they should consider internal control of an organization since assessment of weakness or strength of an organizations internal control is considered a significant aspect in evaluating an audit risk and would therefore has critical effect on audit strategy. In essence, the design as well as execution of internal controls has to be considered as a crucial aspect in gaining a greater understanding about audit risk. Therefore, the auditor shoul d try to understand whether the internal controls employed in an organization are automated or manual. In addition, the auditor should also take into account of the factor that user rely on financial statements. This aspect is very important since it would help in reducing any chance of an organization manipulating the financial data in order to sway financial users that rely on these financial statements while making their investment decisions. Reliance of the financial statements would at time result in intentional manipulation or misstatement of the data by the management with an aim to attract more investors (Houston, Peters and Pratt 1999). Therefore, the auditor should try to look at this aspect at all angles in order to reduce any chance of audit risk. The auditor should also take into account of any likelihood of financial difficulties in an organization (Siliciano 1997). They should look at all the potential or probability of an organization experiencing financial difficulties while conducting its operations. This would help in evaluating or assessing any probability of having some financial misstatement by the management with an intention to influence the financiers and other creditors how the company is financially stable which is not the case. In essence, the management might exaggerate the financial data of an organization when the company is said to be experiencing some financial difficulties in order to attract investors in their stock (Cushing and Loebbecke 1983). Thus, the auditor should be very keen in evaluating whether the firm is experiencing financial difficulties. This would help him or her in ensuring that the financial statement are scrutinized thoroughly and very carefully to reduce any chance of audit risk. Further, the auditor should consider the management of the organization being audited (Novyarni 2014). S/he should assess whether the management followed appropriate accounting standards while preparing the financial statements. S/he should also check whether the management followed the IFRS in reporting their financial performance. This factor would be of great importance to the auditor since it would help him in ensuring that audit risk is at acceptably low level as possible. Conclusion In conclusion, audit risk is usually viewed as peril which auditor might innocently miss to properly adjust his or her view on financial reports which are usually substantially misstated. It affects solicitation of the Generally Accepted Auditing Standards, particularly ideals of reporting and is usually reproduced in assessors normal reports. While auditing an organizations financial data, an auditor aims to lessen as much as possible audit risk in their work to relatively low flat. Hence, in conducting the audit work, the auditor should take into account of various factors. These include account of the nature of the firm and accounting policies followed, industry or sector where a company operates in, regulatory as well as other external facets including all applicable financial reporting structure for the company. The auditor should also take into account of the strategies, objectives as well as associated business risks, dimension as well as appraisal of an organizations financia l presentation. The auditor should also take into account of the internal control in an organization. In addition, the auditor should also take into account of the factor that user rely on financial statements. References Carnaghan, C 2006, Business process modeling approaches in the context of process level audit risk assessment: An analysis and comparison, International Journal of Accounting Information Systems, 7(2), 170-204. Cushing, BE and Loebbecke, JK 1983, Analytical approaches to audit risk: A survey and analysis, Auditing: A Journal of Practice Theory, 3(1), 23-41. Gavin, TA, Hicks, RL and Scheiner, JH 1987, Auditors' common law liability: What we should be telling our students, Journal of Accounting Education, 5(1), 1-12. 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