Session 1.31 RISK BASED AUDITING AN OVERVIEW BY R T I JAIPUR

Session 1.32 OVERVIEW OF THE AUDIT PROCESS Describe Entity Establish Audit Objective and Scope Determine materiality & Assess Risk The Audit Plan Develop Audit Program Review Working Papers and Conclude Evaluating Audit Results Audit Report -Short form - Long form -Special Audit Report Management Letter PLANNINGPLANNING EXECUTIONEXECUTION REPORTINGREPORTING Review, analyse & examine data

Session 1.33 Basic Concepts Importance of knowing entity’s operations Understand significant events, transactions and practices  Understand internal control system 

Session 1.34 Knowledge is basis for audit Materiality level Assessing risk Understanding internal control Nature and source of audit evidence Designing audit procedures Understanding substance of transactions Assessing accounting principles

Session 1.35 What is risk ? Any activity involves risk. Risk is the hazard, chance of adverse consequences and loss associated with the areas of vulnerability / weakness in an organisation which need to be identified to contain damage.

Session 1.36 What is audit risk? The probability that an account balance or class of transactions is materially misstated or contain significant errors. The auditor attempts to limit the risks by assessing internal controls, by deciding the level of sampling and by evaluating the samples As 100% testing of transactions is not possible audit risk cannot be totally eliminated.

Session 1.37 Why assess risk ? The diverse economic and social activities of the state make it imperative for audit to integrate the concept of risk based auditing in its audit planning. In his task of assuring public accountability the auditor must critically evaluate the associated risk.

Session 1.38 The resources available with the department in terms of finances, manpower and time are generally limited vis- à-vis the audit jurisdiction. It is acceptable that audits are performed on test basis,with the resulting risk that we fail to discover all material errors.Therefore we have to assess risk to conduct the audit with an acceptable level of assurance.

Session 1.39 Audit has to be selective Selection must be truly representative of the activities of the auditee organisations.

Session Helps in optimising the use of audit resources. Focusing audit efforts in vulnerable areas

Session The purposes Determine risk levels as input to the audit plan Determine which areas are high risk and help develop an efficient audit approach Assist auditors in their professional judgements

Session What is risk based audit ? Risk based auditing is thus an effective way to design an appropriate audit procedure for a given auditing situation. It is an approach to audit whereby limited audit resources are focused on high risk areas and not spread over thinly;thus diluting its effectiveness

Session As the risk-based approach considers both internal as well as external information for determining the audit procedures and checks, the overall audit risk is minimized considerably.

Session Risk Analysis is an analytical tool for Audit Planning and Execution. This approach focuses on areas, which are likely to generate better assurance instead of sampling and testing a larger, but low risk areas. It insists on restructuring the audit procedures and reorganization of audit work in terms of risk factors. Risk methodologies can thus develop along the existing audit procedures.

Session Difference between traditional audit and risk based audit The purpose of audit has not changed but the methodology employed to achieve that purpose is changing profoundly. Features like focus, timeframe, team,information/evidence and output are being redesigned.

Session focus From accounting systems to Operational processes Targeted audit efforts on identified risks

Session Timeframe From Historical to Prospective From past to near future,important to the users

Session Team Primarily any auditors/accountants To multi- disciplinary experts with specialized knowledge

Session Information/Evidence From third party detail testing TO unit based control testing Weaknesses are examined thoroughly

Session Output From finance function to operational issues Recommendations for improvement range deep into operations and become much more valuable

Session To sum up Based on the available data and using his judgment the auditor makes an assessment of the factors which could lead to misstatement of facts of occurrence of material errors. He determines sample size and substantive procedures to be performed for audit of different categories of risk areas.

Session He carries out audit tests on identified areas to obtain greater assurance He evaluates the results. He forms the audit opinion and reports

Session Thank you