Risk Identification

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Risk Identification

• Presented By
• RTI, JAIPUR

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• Risk identification and assessment in respect of
  entities planned for audit is essential from the
  auditors point of view to obtain the required
  level of assurance.
• Risk profile of all entity detailing all the
  possible risks that an entity is exposed to
  should be maintained
• The risk analysis serves as a criterion for
  selection of audit topics and identifying the key
  areas of audit.

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• In analyzing risks, auditors faced with an
  entity/area can ask the questions
• What can go wrong?
• What is the probability of it going wrong?
• What are the consequences?
• Awareness of entities/areas helps the auditor to
  focus attention on programme/activities at risk.

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Risk Identification

• Elements of the external environment
• Business environment
• The entitys primary activities and those factors
  that may impact on the achievement of its
  objectives
• Political environment
• Interest of the govt., parliament, media,
  pressure group and specific factors which may
  influence the conduct of business or reporting
  the results
• Future events
• Planned or potential changes in future, including
  changes in legislation, new programs/ services,
  changes in technology,new developments

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Risk Identification

• Financial and Performance reporting requirements
• How do they impact on the entitys operations and
  the way that they run
• Other key areas in the environment
• Claims against the entity, warranties, etc.

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Risk Identification

• Framework of Authorities
• Authorising legislation
• The operations and activities authorised by the
  legislation
• Regulations issues under the authorising
  legislation
• Significance of regulations in the entitys
  activities
• Parliamentary authority
• Purposes for which provision has been made-
  Appropriation

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Risk Identification Overall Control Environment

• Organisation, roles and responsibilities
• Organisational structure and assignment of
  responsibility
• Clear lines of responsibility, proper delegation
  of authority
• Human resource policies and procedures
• Appropriate qualifications, skills and competence
• Monitoring and control
• Plans and budgets timely, reliable
• Effective internal audit
• Competent and effective

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Risk Identification Transaction level controls

• Authorization
• Moneys spent as per intention, are approved and
  recorded
• Completeness of input
• All payments, adjustments, receipts processed

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Risk Identification Processing controls

• Integrity of standing data
• Changes authorised and accurate
• Completeness and accuracy of data
• Restricted access to assets and records
• Monitoring activities
• Management review, appropriate follow up action

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Risk assessment

• Identify the specific risks to material
  mis-statement
• Managements response to the risk
• Residual risk
• The account areas that residual risk affects
• The extent of the risk to determine the kind of
  testing required
• Controls, analytical or substantive

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Identify Key Areas/ Lines of Inquiry for VFM
Audit

• Systematic selection process enables the most
  effective use of limited audit resources.
• It helps to focus on those audits which have
  maximum value added in terms of improved
  accountability, economy, efficiency and
  effectiveness.

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Factors for identifying key areas

• v     Significance
• v     Risk to management
• v     Likely impact of audit
• v     Audit ability

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Sources of information for identifying key areas

• 1. Project Appraisal report
• 2.      Project budget
• 3.      Project accounts
• 4.      Agreements with funding agencies
• 5.      Drawings and designs
• 6.      Contract agreements

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• 7. Management reports
• 8. Road Engineering Manuals of National Roads
  Institute
• 9.Internal audit reports
• 10. Media reports
• 11.Work sites
• 12.Project personnel (including Consultants and
  Contractors)

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Analytical Review

• Key learning points
• Definition of Analytical Review
• Types of Analytical Review

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Single component comparison

• Comparing single accounts item
• Trend analysis
• Comparison with budget
• Low assurance

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Ratio analysis

• Relationship between 2 or more accounts items
• Also called cross-component analysis
• Low/medium assurance

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Business analytic

• High level financial ratios like liquidity
  profitability ratios
• Good for understanding entity
• Gives no assurance

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Benefits

•  quick way to obtain audit assurance without
  having to do a lot of detailed vouching work
•  easy to identify balances that do not make
  sense
• forces one to understand movements in the
  accounts over the course of the year
•  increases knowledge of entity being audited
•  good summary of the years activity
•  useful for planning to identify the areas of
  risk
•      

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• useful at end of the audit to assess
  reasonableness of balances and
• because they are based on relationships, they
  may provide assurance for several assertions at
  once, i.e. fluctuations in total balances often
  affect recorded and accumulated figures, can find
  errors quickly.

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Pitfalls

•  too superficial an analysis to find any errors,
  unless the error is obvious
•  calculation is too simplistic to reasonably
  estimate an amount
•   not enough knowledge or information of the
  entity to make a reasonable estimate
•   a fluctuation can always be rationalized after
  the fact
•  didnt understand reason for the procedure
• it didnt work, and it would have taken too long
  to follow up

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• Thank You