Financial Risk Audit: What It Means And The Risks It Covers
Financial audits are crucial in the world of business – they assist companies in learning more about how well they are doing financially and what they can do to improve. Among the primary purposes of an audit is to provide a business with the information it needs to survive and develop further. It involves assessing and ascertaining operational, financial, and strategic goals and processes in business.
While several types of audits exist, a company may find it especially useful to hire an auditor to assess itself for potential risks. Specifically, it would be beneficial for a business to engage the services of a Singapore audit firm to evaluate it for financial risks. To understand more about financial risk audit, read on as this article briefly explains its meaning and the type of risks it covers.
What is a financial risk audit?
A financial risk audit involves the assessment and analysis of a financial statement to identify any potential threats. This process is an excellent way of evaluating the effectiveness of an organisation or company’s risk management system. When it comes to financial statements, auditors conduct risk assessments to determine and rectify misstatements. An auditor typically utilises the following procedures when auditing for risks;
- Inquiry: Meetings are conducted between the auditor and the financial personnel of the company so that the former can acquire information about the organisation’s practices.
- Inspection: This involves ensuring the company complies with different policies and obligations.
- Observation: The auditor observes the company’s employees as they conduct internal control activities, then reviews the information they obtain and compiles a report.
- Analytical procedures: These procedures assist an auditor in establishing the reason or rationale behind any discrepancies between reported and expected amounts.
The different types of risks involved in a risk audit
There are various types of risks an auditor might encounter whenever they run a risk audit. Here are the major types of risks usually involved in a risk audit:
1. Inherent risk
Inherent risk refers to an assessed level of untreated or raw risk in a process. Concerning financial statements, the common cause of this type of risk is an error of omission. It is necessary to detect any inherent risks an organisation might have since these risks can potentially mislead investors. The most common situations or mistakes that can cause inherent risk include human error, non-routine transactions, and complex organisational structure.
2. Control risk
Control risk is the possibility of a misstatement in a financial statement either because there were no measures in place to identify such misstatement or the measures did not work. Often called ‘internal controls’, these measures may involve regular monitoring of processes, performing risk assessment activities, and gathering and submitting reports. Examples of control risks that can occur when a company lacks these measures are cybersecurity risks, fraud, and integrity and moral risks.
3. Detection risk
Detection risk refers to an auditor’s inability to identify a misstatement in a financial statement. Most of the time, auditors analyse a statement for inherent and control risks first. This leaves detection risk as the final aspect of the procedure. Some of the most common examples of detection risks are low competency level, improper planning and usage, incorrect auditing methodology, and close auditor-auditee relationship.
Risks are unavoidable in auditing, especially when conducting a financial risk audit. Knowing the types of risks one is likely to encounter when one runs a risk audit is essential, as it can help enhance their competency in conducting this kind of audit. If you are a risk auditor, understanding more about auditing for risks could ultimately help you excel in your role. Alternatively, suppose you are a business owner hiring a risk auditor. In that case, learning more about these risks still proves beneficial so that you can have an idea of your company’s stability.
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