Audit risk may be minimized in two ways:-
(a) By ensuring that planning is adequate.
(b) By following ISA 220 on quality control
(a) Planning: –
If an auditor plans an audit properly, those areas of the audit that are potentially risky will have been identified, and the auditor can ensure that resources are devoted to those areas to minimize the risk of misstatement in the financial statements.
• Ensuring that the audit objectives are known e.g. statutory audit only, and therefore ensure that the client accepts this by sending a signed copy of the engagement letter back to the auditor. The auditor is not looking for any immaterial fraud as this would not affect the true and fair view given by the financial statements.
• Planning the audit will ensure that work is directed to cover the whole of the company‘s accounting systems. Thus reviewing last year‘s files and discussions with management will identify all the accounting systems – adequate audit programmes can then be written to cover all of these systems.
• If particularly difficult or critical areas come to light then additional resources will be devoted to these to investigate the problem fully. Thus last year‘s file
may note a difficult stock-take; therefore an experienced senior may be sent to attend this year rather than a semi-senior or junior staff member.
The aim of planning, therefore, is to identify risk areas early in the audit and to ensure that appropriate action is taken to minimize the potential risk that they pose.
(b) Other areas
ISA 220 notes that if the auditor ensures that all jobs are done to a high standard, this in itself will minimize the amount of risk involved. A complete, well presented and referenced audit file is likely to prove of much more value in court than a shoddy and only partly referenced file.
Particular procedures to employ to ensure that audit work is of a high standard include:
• observing all Auditing Standards;
• before accepting any appointment, ensuring that there are no conflicts of interest between the firm‘s duty as auditors and other non-professional situations e.g., client being a close relative;
• following from above, also ensuring that potential clients are of a good standing
e.g. not potentially insolvent; management have integrity.
• ensuring that the firm has the skills necessary to perform the service for the client e.g., detailed use of computer auditing if the client has a highly computerized accounting system;
• ensuring that consultative procedures are available to reconcile problems between staff and partners;
• ensuring that full file reviews are carried out either by another auditing firm, or by another office of the same firm.