Audit risk and the concept of materiality

Audit risk is the risk of an organization specializing in the provision of audit services, which consists in the possibility of poor-quality inspection or its inefficiency. Thus, the audit firm takes into account the degree of entrepreneurial risk when working with clients. His example is the likelihood of an error in the financial statements of an economic entity.

In addition, the audit risk can be viewed from the other side: the potential to detect shortcomings or distortions in accounting records, which in fact do not exist. But in any case, the risk implies the erroneousness of the auditor's judgments in relation to a particular client.

Audit risk can be divided into three main types:

1. Intraeconomic.
2. Control.
3. Procedural.

The first type of risk is still called pure. It reveals the likelihood of an unfavorable situation, that is, the occurrence of errors or shortcomings in a certain balance sheet item before they are directly identified by the internal control bodies. In this connection, the inspector should pay attention to such factors as the experience and qualification of the accounting department staff, the honesty and clarity of the tasks of the personnel management, the relationship between the higher-level officials with the lower-level officials and the degree of pressure over the latter. In addition, it is necessary to take into account the specifics of the industry in which the client firm operates.

Control audit risk is the probability that the methodology used by the client for accounting and reporting is not able to detect errors in a timely manner and promptly correct them. That is why the auditor needs to rationally evaluate the introduced accounting system and characterize the degree of its reliability. Based on the data of such appraisal activity, the specialist will understand what area he should pay close attention to.

Procedural audit risk or the risk of non-detection implies the possibility of the auditor applying methods and techniques that in a given situation proved ineffective and unable to detect any errors. This in the future can lead not only to the undermining of the reputation of the audit organization, but also to the significant financial losses of the economic entity. Each specialist should reasonably assess the level of poor performance of his work and make every effort to reduce this indicator. For example, it can increase the number of audit trails or give the verification procedure more time than planned.

In the course of its activities, each expert performing the audit should remember the fundamental difference in such concepts as materiality and audit risk. Materiality means the existence of circumstances that may in some way affect the result of the audit, and, consequently, the conclusion issued to the business entity. Before working with a specific client, the specialist sets the materiality level at the planning stage, that is, the permissible limit of the distortion value.

Audit risk can be assessed by one of two proposed methods:

1. Quantitative.
2. Estimated.

The first method suggests the use of certain models to calculate the risk in terms of value or coefficient equivalent.

The evaluation method is also called intuitive, it is based on the personal experience of the auditor, who, after studying the reporting as a whole or individual balance sheet articles, concludes about the degree of risk. The evaluation criterion is the division into an unlikely, probable and high risk project. This method is actively used by audit firms of our country.

It is important to note that none of the above methods of reducing the level of risk can lead to a zero value. The proportion of the likelihood of an adverse situation and the assumption of errors is always present. And the task of the auditor is the maximum reduction of the estimated level of risk.