Risk assessment challenges for auditors
Risk assessment is critical to the performance of all financial statement audits. This Audit and Assurance Faculty guide explores some of the aspects of risk assessment and the auditor’s response that continue to present challenges to auditors.
The idea of a “risk-based” approach to auditing is not a difficult concept: it refers to the focus of the audit process on those areas that are most at risk of material misstatement. Nevertheless, both auditors and regulators report problems in determining what constitutes a “significant” risk, a “material” risk and a “high-risk area”.
The last major revision to the risk ISAs was in 2003 and triggered significant adjustments to many firms’ methodologies. Firms of all sizes initially struggled to apply the new requirements, and there was general agreement that while there was nothing inherently difficult about the new ISAs, they were unwieldy, not an easy read, and were particularly hard to apply to smaller, less complex audits.