We use a risk based approach to audit a company's year-end
financial statements, but the term " risk based audit
approach" can sound like the latest in business buzzwords
similar to holistic, innovative and mission critical.
The substance behind the term "risk based approach"
comes from Canadian Auditing Standards, the standards Canadian
accountants apply when performing an audit. In fact, the standards
dedicate a section to risk assessments: "CAS 315 Identifying
and Assessing the Risks of Material Misstatement."
Internal and External Risk Assessments
What does a risk based audit approach mean? We do a risk
assessment during the planning phase of an audit looking for both
financial reporting risk and business risk. Financial reporting
risk is when a company's financial statements don't reflect
the company's operations and users of the statements rely on
the inaccurate portrayal to make decisions.
We also assess the company's business risk starting with an
external review of the company's industry, its regulations and
its use of technology. After an external review we move into
Every analysis of the company's operational risk includes an
assessment of the company's ability to continue as a going
concern. We ask the basic question: will the company be able to
make it beyond the following fiscal year? Moving from big picture
to the smaller details we look for issues that could cause a
company to fail. What would the possible catastrophe look like?
Most businesses are healthy, but Canadian Auditing Standards
require a going concern assessment for all companies. The exercise
is used to both identify the rare company that could become
insolvent and to identify a company's risks. We perform the
analysis at the start of an audit and at its end (to consider any
new information uncovered during the audit itself).
We use the assessment to design the audit including the
procedures used to test the company's balances and
transactions. High risk balances and transactions are tested in
greater detail with low risk balances receiving less testing. Using
a risk based approach results in efficiencies when performing the
Risk Assessment by Management
A risk based audit results in efficient and effective audits,
but a risk assessment can also be a valuable tool for business
owners and managers. When was the last time you sat down and
performed a risk assessment of your business? Or asked yourself the
question: what could cause the business to fail in the next year?
Being proactive about risks can mean identifying and minimizing
Five years ago, if a cable TV company performed a risk
assessment they would have identified early signs of an industry in
upheaval. Changing technologies matched with changing demographics
were moving television to online streaming and Netflix had entered
the Canadian market in 2010. If we looked around today these signs
are obvious; however, it's only within the last year that the
largest cable providers have responded with their own online
Better Public Company Risk Disclosure
Financial Reporting & Assurance Standards Canada has an open project looking at changing the
Auditors' Reporting Standards for public companies. The project
looks to add a section on significant matters in in the
Auditors' Report attached to audited public company financial
statements. If the changes go through this will give users of
public company financial statements a clearer view of items that
impact a risk based audit approach. Canada is considering the
change to align reporting standards to expected changes in
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Over the past year, we have watched the Canadian dollar drop relative to its U.S. counterpoint impacting Canadian businesses. U.S. goods and services are now more expensive, U.S. sales make a premium and errors when recording foreign exchange transactions can cost you more money.
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