The effective steps for risk assessment to identify the risks regarding the misstated data in the financial records - Essay Example

? It is necessary for the auditor to perform effective steps for risk assessment to identify the risks regarding the mis d data in the financial records, the affirmation level and auditor should use the analytical procedures for the risk assessment (ISA/HKSA 315(6b)). One of the obligatory things for the auditor to execute the analytical procedures for risk assessment through out the audit practices to evaluate all the financial records whether they are reliable and satisfy the auditor (ISA/HKSA 520(6)). There are number of non-audit practices where analytical procedures are being used commonly like, information relating to the future financial potential or gathering data from reviews regarding the previous financial information. Such analytical procedures which are applied in non-audit engagements are not sheltered by the ISAs. Defining the Analytical Procedures The analytical procedures can be described as ‘evaluating the financial records by analyzing the credible relationship between the financial records and non-financial records’. It can be also included that ‘such analysis is mandatory to identify the difference or inconsistency of relevant data or the difference between provided data and the estimated values’ (ISA/HKSA 520(4)). The basic principle to apply the analytical procedures is the expected existence of the credible relationship may occur and the analytical procedures may carry on in such circumstances in the non-appearance of the opposite factors. Defining the purposes Auditors use analytical procedures in the entire audit course to achieve the three main purposes of audit: 1) Preliminary analytical review These are the introductory analytical reviews, which assist the auditors to get an idea about the business and industry. They can start with reviewing the previous financial records, performance of industry and the competitors. This will lead them to decide the nature of audit, the time period required and the level of analytical procedures. Basically, preliminary analytical reviews help to design the strategies and plans to conduct the audit. 2) Substantive analytical procedures Auditors can use the analytical procedures substantively. If the auditors feel that their analytical procedure can bring more accurate results rather than using different tests, so they usually reduce the level of tests to identify the misstated facts of the financial records. These procedures will be known as substantive analytical procedures. 3) Final analytical reviews Financial records are analyzed thoroughly by the auditors through analytical procedures, which lead the independent individuals towards the outcomes whether records are accurate or in compliance with auditors’ understanding. So analytical procedures are applied finally to analyze the facts but these procedures are not executed to get hold of the extra substantive analysis. In such case, if auditors find any inconsistency in the records, they must repeat the risk assessment procedure and if they feel the need of extra analytical procedures, they can go for it. Substantive analytical procedures usage Acquiring the evidence of audit that must be reliable and appropriate is one of the basic points of analytical procedures. While applying the procedures of substantive analytics, auditors need to acquire the guarantee with the assistance of other auditing tools and controls. These tools and controls help the auditors to evaluate the results of different sections after applying analytical procedures. Such analytical procedures have ability to cover a wider range of transactions that is why procedures of substantive analytics are normally used to analyze the financial records. As it is briefly told that the auditors apply substantive analytical procedures on the expected existence of the credible relationship between financial data and they may carry on this analytical procedure in case of non-appearance of contrary factors. The existence of relationship between the data provides the base of audit evidence that leads the auditors to accurate and complete transactions. By nature, these analytical procedures are very effective as they have ability to obtain evidences for different levels. Through this approach, the identification of conflicting auditing issues drags the attention of auditors towards the areas, which require in-depth analysis. Moreover, it also assists the auditor to highlight the deficiencies of internal control system and helps to identify the risk in this regard. This will raise some other auditing issues and auditor will look once again on the previous analysis to assure himself that all the previous work is efficiently done. It will be more effective approach if the auditor may use the substantive analytical procedure before using the other tools and controls. The result of this approach put direct impact on the nature and level of in-depth testing. It makes the auditor to focus more on the areas of more risk. Applying the substantive analytical procedures will enable the auditor to get maximum assurance and thus he will rely less on the other testing controls. The procedures of Substantive analytics can be used with the help of four elements, which are included in different steps. Step 1: The most significant step of using the substantive analytical procedures in audit practicing is the advancement of proper and accurate objective expectation. Expectation can be referred to the prediction or forecast. So it can be in numbers, ratios, percentage or anything else. Analytical procedures state that ‘evaluating the financial records by analyzing the credible relationship between the financial information and non-financial information’. So, there must be an unbiased expectation by the auditor while using the procedures of substantive analytics (ISA/HKSA 520(5c)). This will happen if the auditor will identify the conceivable relationship between the records and the existence of relationship is plausibly expected. Thus the auditor can make the efficient use of it by developing an independent expectation. Step 2: Auditor must fix a resonable amount of difference between actual and the expected while applying the substantive analytical procedures, which may require no more analysis and is easily acceptable (ISA/HKSA 520(5d)). This acceptable level of difference is known as ‘threshold’. We can consider threshold as an amount, ratio or percentage of the data analyzed. Auditor can only make efficient use of procedures of substantive analytics by establishing the accurate threshold. An auditor’s opinion should be unbiased. To do so, the expectation of accurate threshold is mandatory. So auditors must decide the significant level of difference between actual and expected while determining the levels of substantive analytics. After that it will become easy for the auditor to compute the amounts in next step. Auditor should remember the fact that the threshold must be reasonable amount of possible misstated facts and he should ensure this factor that the amount is not exceeding the limits, so that auditor may easily identify the misstated facts regarding material or non-material items. Step 3: Calculate difference At the next step, auditors compare the actually recorded values with the expected values and then compare the difference with the significant difference i.e. threshold. So this is just a calculation of differences. Auditors should consider the technique not to compute the differences before determining the expectation and significant difference. Do not compute the difference determined and actual difference while practicing the substantive analytical procedures because it will affect the outcome of expectation and threshold in the procedure. Step 4: Investigate threshold and draw conclusions In the last step, auditors investigate and analyze the threshold and after that they conclude the substantive analytical procedure (ISA/HKSA 520(7)). All the differences show greater than before possibilities of misstatements. If auditors will find more accuracy in items this will result of more misstatement in differences and if they find less accuracy in investigation, this will result in low misstatements in differences. The entire amount of difference should be considered for the explanation. This will be more effective because there will be a chance of increased risk regarding material misstatements, which will be shown by the difference. It is duty of auditors to find out the reasons for misstatements. They must consider the factors which may overlooked at the development stage of expectation. This could happen due to unexpected business circumstances as well but in case of difference, if the factors had overlooked then auditors should validate the new records. This will allow the auditors to show the impact of misstated facts if they were considered. Precision in analytical procedures Precision is affected by four main elements in the analytical procedures while performing the audit. 1) Disaggregation The possible precision or accuracy of the analytical procedures is able to be maximized at comprehensive levels. It is obvious that all the analytical procedures are executed at very high levels, which increase their importance. When the differences are balanced against each other, the auditor’s attention may be dragged to the differences when analytical procedures are applied with data disaggregation. It depends upon the audit objective to decide whether required data needs to be disaggregated or not. It basically determines the level of data disaggregation. There is no doubt in it that analytical procedures containing disaggregation may be the finest consideration to compose the timely balance and its sources of core elements of the disaggregated data. The data consistency is affected by the information comparability and information relevance which is available to the auditors. 2) Data reliability In analytical procedures, the accuracy of expectation depends upon the consistency of the data. Analytical procedures should have the data extracted from the industry and financial data collected by primary resources. The sources from where information is being collected have vital importance in this regard. The data extracted from internal resources, which are not relevant to manipulation or any financial record that was not influenced by any personnel would definitely be taken as consistent data. 3) Predictability In a data, there are two important elements i.e. predictability and the expectation. Most important thing is that both are interlinked and depend on each other. It is the general fact of the analytical procedure is that more accuracy and more precision in expectation enhance the potential of the analytical procedure. Auditor can also rely on the data other than financial records. Such kind of data would be helpful to predict about the interactions of accounts. But all such things are dependent of reliable data. 4) Types of analytical procedures In audit practicing, there are of many types that are being widely used. All have their separate impact on the accuracy of expectation. It is upon the auditor that which type he considers for his practicing and it also depends upon the objectives of the audit procedures. Trend analysis It is analysis which changes by the time and requirement is the trend analysis procedures. Ratio analysis In this procedure, auditors compare the actual data with a pre-set benchmark and check the relationship among the financial records and non-financial records. Reasonableness testing It is such sort of analytical procedures where auditor analyzes the accounts, both economical and non-economical and makes changes in accounts to design a model for expectation during the period of accounting. Every type has its own way to develop a model for expectation. All the methods are categorized from highest priority to lowest priority and this system is based on their accuracy performance or precision. In all these procedures, scanning analytical procedure is totally different from rest of the types. In this type of procedure, auditors analyze the information within the accounts and other available data to highlight the irregular entries. But there is one common characteristic in all analytical procedures that all procedures require accuracy to enhance their reliability potential. Conclusion A risk based approach in an audit procedure depends heavily on the procedures of substantive analytics because these are properly developed and executed accurately. These have ability to permit the auditor to accomplish his objectives and goals efficiently and save the time by replacing the detailed methods with it. Auditor should understand the nature of business and its atmosphere and should adopt professional approach in this regard. This will help him to apply the effective analytical procedures according to the requirement and need of the business. All the audit work should be in documented form properly no matter what procedure the auditor is using for that approach. 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