Chapter 4 Management Fraud and Audit risk

Chapter 4 Management Fraud and Audit risk - Chapter 4...

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Chapter 4: Management Fraud and Audit risk Management’s Responsibility for managing risk Risks that could adversely affect company’s ability to achieve objectives and execute strategies are called business risks. Business risks might result from setting inappropriate objectives and strategies or from changes or complexity in company’s management. Risks can arise within the business through employee and management failures. Results of transactions are recorded through information processing where errors and frauds can occur result in misstated financial statements ( inherent risk), which can lead users to incorrect decisions ( information risk). Managers build in controls to prevent this from happening, but they may not function as intended ( control risk). The investors rely on auditors to reduce information risk, but there us also risk that auditors will gave an incorrect opinion (audit risk). Enterprise Risk Management Given changing environment in which today’s businesses operate, management, internal auditors, and external auditors must focus on risks to entity’s operations and ensure that controls are in place to eliminate, mitigate, or compensate for those risks. Managers should address these concerns to employ an enterprise risk management (ERM). ERM framework is composed of eight elements: Internal Environment: is “risk consciousness” os organizations and includes the organization’s risk management and “risk appetite ” its integrity and ethical values and environment in which it operates. Objective setting: is management’s responsibility to determine the goals and objectives of the organization. Event Identification: is identification of conditions and events that could affect management’s objectives. Risk Management: is systematic process for estimating the likelihood of adverse condition occurring. Risks are accessed in terms of both likelihood and impact. Risk Response: addresses how organization will prevent or respond to adverse conditions if they actually occur. The response include management policies and procedures to eliminate, mitigate, or compensate for risks identified. Control Activities: are policies and procedures to ensure that risk responses are appropriate given the circumstances and environment in which organization operates. Information and communication link all components of ERM.\ Monitoring: includes regular management and supervisory activities over risk management activities to make sure they remain in lace and operate effectively. Auditor’s Risk Management The three basic ways that management can mitigate a risk are (1) avoid it, (2) control it, (3) share it. In addition to business risks, auditors must assess the risk of providing incorrect information to financial statement users.
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