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Risk Assessment Process
Risk assessment is an essential systematic factor influencing organizational management activities. Accordingly, Sinha (2019) offers a five-step process for assessing risk and enlightening the risk management process. The process begins with identifying a potential hazard that may harm the organization and then determining the parties affected by the hazard. Consequently, the assessment follows with the development of risk prevention or eradication measures. Establish a write-up of identified threats and measures proposed to prevent the risk. Lastly, the risk assessment process is completed with a review of the risk assessment, making progressive adjustments to the measures identified (Sinha, 2019). The procedure chosen is essential to support the development of contingencies against risk and ensure organizational resilience. The choice allows preparedness and flexibility of the organization in handling potential setbacks in operations.
Employees are an essential factor in the operation of an organization and decision-making. Research by Call et al. (2017) indicated that employees facilitate superior input in reporting choice selection. Thus, employee involvement in risk assessment is theorized to offer more influence in fraud uncovering than auditors. The findings are based on the conceptualization that they possess knowledge of organizational operations, which helps them detect misreporting in financial statements. Therefore, their involvement is essential for financial risk assessment of misstatements as they increase the capacity to identify abnormal transactions (Call et al., 2017). Consequently, when a risk of material misstatement is identified and is valued as a significant risk, the auditor is expected to test to reaffirm the findings. Consecutively, the auditor reports the risk and sets up corrective actions to eliminate the threat.
Materiality and Auditing
Materiality is an integral part of accounting and auditing processes influencing outcomes. Foremost, materials refer to diminishing errors or misstatements in financial information (David & Abeysekera, 2021). Consequently, low materiality implies a lower probability of errors or misstatements. Kumor and Mackowiak (2018) argued that in financial auditing, materiality levels dictate the auditor’s scope of financial audit and grounds for reference in reporting the impact of misinformation. Conversely, in accounting, materiality instigates simplified but accurate representations of financial information for effective processes (Kumor & Mackowiak, 2018). Moreover, the phrase “obtain reasonable assurance” in the auditor’s report is interlinked with materiality as auditors are expected to offer evidence to validate their opinions (Bunjaku, 2019). Thus, applying materiality assessment presents auditors evidence on the level of impact or risk the materials identified impose. Therefore, their decisions are reasonable and effective in managing the risks.
Correspondingly, benchmarks have been incorporated as an integral tool for materiality assessment for auditing. Benchmarks are applied as a comparative mechanism for audit, considering performances in particular activities. Thus, auditors can benchmark a range of sectors, such as assets affected line items and earnings, and could employ multiple or single-based assessments (Acito et al., 2019). Consecutively, Acito et al. (2019) derived that in most instances, auditors conducted single-based benchmarks for public clients incorporating earnings as the variable in the matrix. Nonetheless, materiality is essential to the quality of financial statements that support the effectiveness of accounting and auditing. However, David and Abeysekera (2021) stipulated that the development of exact rules and frameworks for materiality assessment is problematic as the choice of assessment varies based on variables incorporated without a standardized framework. Therefore, the aggregation of these issues compiles materiality’s intricate impact on auditing outcomes.
References
Acito, A. A., Burks, J. J., & Johnson, W. B. (2019). The Materiality of Accounting Errors: Evidence from SEC Comment Letters. Contemporary Accounting Research, 36(2), 839–868. Web.
Bunjaku, F. (2019). Audit components: Literature review on audit plan, risk and materiality and internal control. Journal of Economics, 4(1), 36–43. Web.
Call, A. C., Campbell, J. L., Dhaliwal, D. S., & Moon, J. R. (2017). Employee quality and financial reporting outcomes. Journal of Accounting and Economics, 64(1), 123–149. Web.
David, R., & Abeysekera, I. (2021). Auditor Judgements after Withdrawal of the Materiality Accounting Standard in Australia. Journal of Risk and Financial Management, 14(6), 268. Web.
Kumor, I., & Mackowiak, E. (2018). MATERIALITY IN ACCOUNTING AND AUDITING. In A. V. Kovrov, O. A. Popov, & A. C. Casni (Eds.), Economic and Social Development (Book of Proceedings), 32 nd International Scientific Conference on Economic and Social Development. ResearchGate. Web.
Sinha, T. (2019). Risk assessment and management. Memorial University of Newfoundland.
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