Higher normal risk, Auditing

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Higher  normal risk

Several audit assignments involve high audit risk and usually in any client there will always be at least one high risk area.  Indications that an audit has an element of higher than normal audit risk include:

(1) Poor management with lack of control and poor book-keeping;

(2) Liquidity problems and high gearing;

(3) The opposite of all the factors mentioned in the normal risk above;

(4) Recent changes in ownership, control or key staff;

(5) Changes in accounting policies or procedures;

(6) Future plans to seek quotation on the Nairobi Stock Exchange;

(7) Over-reliance on a few products, customers, suppliers and investments in new ventures or products;

(8) Problems inherent in the nature of the business for example difficulties in stock counting or valuation, difficulties in determining the extent of claims and provisions and cut-off problems;

(9) The existence of put upon enquiry situations, dominance by the single person and lack of involvement of directors or proprietors.  In such a situation, the auditor approaches his audit in a manner that is:

    •    Sceptical, relying on high calibre staff
    •    Collection of audit evidence in each area from a wide range of sources
    •    Taking extreme care in the preparation of audit working papers
    •    Investigating thoroughly high risk and problematic areas
    •    Exercising extreme care in drafting the audit report

In addition to normal risk and higher than normal risk discussed above, the auditor can also be exposed by sub-standard work such as:

i. His failure to recognise put upon enquiry situation
ii. His failure to draw correct inferences from audit evidence and the analytical review
iii. His use of wrong procedures in a particular situation
iv. His failure to perform necessary audit work because of time and cost consideration
v. His failure to detect errors or fraud because of poor sampling methods or the selection of inadequate sample sizes

It is essential that an audit firm should organize itself in such a way that it can minimise the risk of suffering any damage.  We can look at these measures from two points of view.  Broad measures taken by the profession as a whole and measures to be taken by the individual auditor in minimising this audit risk.


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