The purpose of the study is to trace the development of risk-based audit approaches, in
order to understand the complexities and difficulties of these approaches, as well as to
evaluate these risk-based audit approaches, with the objective of assisting in the process
of improving the risk-based audit approach followed by the audit profession. The only
defence auditors have against the anger (or frustration) of stakeholders in instances of
corporate failures is sufficient, appropriate audit evidence that proves their innocence.
This audit evidence will be the result of a well-planned and performed audit. An audit
approach, currently a risk-based audit approach, is therefore a crucial component in the
performance of an audit.
Changing the risk-based audit approach is a normal consequence of the striving for the
improvement and development of the services that the auditing profession provides. In
developing the risk-based audit approach, there are certain complexities surrounding an
audit that should be considered. The major complexities in the performance of an audit
are: first, the expectation gap; second, the uncertainties surrounding the responsibilities of
the auditor; third, the provision of reasonable assurance, and fourth, the practical
implementation of audit standards.
The auditing profession should, during this continuous process of changing the auditing
standards and guidance, consider and evaluate changes against the theoretical
foundations of auditing to support the credibility of the audit process.
The theoretical framework that formed the background of this study is discussed in the
second chapter, including the meaning of ârisk-based audit approachesâ. Audit
approaches are discussed that developed before the acceptance of the risk-based audit
approach, together with audit approaches that were never followed or accepted by
practitioners, and which influenced the development of risk-based audit approaches.
The development of the first risk-based audit approach, the statistical audit risk approach
(audit risk model) that originated from the Elliott and Rogers model is discussed in the third chapter. The critique on the statistical audit risk approach is summarised and
consists mainly of the following: that the audit risk modelâs event structure is ill-defined
and that the risk components lack independence, which is a basic assumption for the use
of the multiplicative formula. The risk components are complex and interdependent and
are difficult to assess therefore, practitioners prefer to assess these risk components in
linguistic terms e.g. low, medium and high. The multiplicative rule does not provide
protection against an understatement of audit risk if the audit outcome space is not
completely specified and when a revision of the audit plan is needed. The aggregation of
the individual risks is problematic and therefore the audit risk model should be used only
for planning purposes.
The development of the inherent risk audit approach (audit risk model from a conceptual
perspective) is discussed in the fourth chapter. The critique against the inherent risk audit
approach includes the unsuccessful decomposition structure of audit risk, due to the
interdependency of inherent risk and control risk. The concept of âinherent riskâ is also
too broad and vague.
The business risk audit approach is also discussed in the fourth chapter. This approach
was developed by audit firms as an intended improvement on the inherent risk audit
approach and is still widely used. The main critique against the business risk audit
approach is the lack of a clear link between business risks and possible risks of material
misstatement.
The ârisk-process audit approachâ is addressed in the fifth chapter. For the purposes of
this study, the name of the current risk-based audit approach is the risk-process audit
approach. The reason for this formulation is the emphasis in the audit risk standards on
the risk management tasks.
The concept of âriskâ in the performance of the task of identification of risks is, in essence,
a choice in which the auditor has the freedom to choose an approach, and is referred to
as ârisk of material misstatementâ. The concept of ârisk of material misstatementâ is much
broader and different from the suggested definition in the auditing standards, and includes the consideration of potential misstatements according to the assertions on the assertion
level (assertion-focus), and lacks conceptual clarity.
The criteria for the task of âassessment of identified risksâ are as follows: the different
types of assertions are used as the criteria for assessing risks of material misstatements
through the identification of possible misstatements. The concept of âmisstatementsâ is
the criterion used to consider the likelihood of misstatement(s), and the concept of
âplanning materialityâ is used to consider the magnitude of misstatement(s).
In the sixth and final chapter of this study, the development of risk-based audit
approaches is summarised through a comparison of the risk-based audit approaches. In
the future development of the current risk-process audit approach it is suggested that a
fourth aspect, the significance of audit procedures, additional to the current nature, timing
and extent of audit procedures maybe considered in respect of aspects that influence the
response to risks of material misstatement included in the audit plan. Furthermore, the
definition of the concept of ârisk of material misstatementâ could include the assertionfocus.
The importance and possibilities of the division of audit planning in the financial
statement level and the assertion level is also not yet fully considered.
In conclusion, the author believes that the history of risk-based audit approaches has
repeated itself and that the development of the risk-based audit approach and changes
thereto were not considered against, and based on a sound foundation of auditing theory.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:ufs/oai:etd.uovs.ac.za:etd-11222010-143504 |
| Date | 22 November 2010 |
| Creators | Prinsloo, Jeffrina |
| Contributors | Prof DS Lubbe |
| Publisher | University of the Free State |
| Source Sets | South African National ETD Portal |
| Language | en-uk |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.uovs.ac.za//theses/available/etd-11222010-143504/restricted/ |
| Rights | unrestricted, I hereby certify that, if appropriate, I have obtained and attached hereto a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to University Free State or its agents the non-exclusive license to archive and make accessible, under the conditions specified below, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report. |
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