Risk Analysis Model

‭Risk analysis model‬ ‭Introduction‬ ‭ he risk analysis model is a structured approach that can be used to determine the‬ T ‭nature, scope and timing of the audit procedures to be carried out in an efficient and‬ ‭effective manner. The basis for this is recognizing, estimating and evaluating the risk‬ ‭that the statements of management, which implicitly underlie the (financial)‬ ‭accounting, contain material inaccuracies.‬ ‭ isk analysis: its development in perspective‬ R ‭In the 1957 edition (p. 50), Montgomery for the first time made a connection‬ ‭between the risk that the accountant must cover with his audit work and the‬ ‭effectiveness of internal control measures. In the audit standard entitled The‬ ‭Auditor‟s Study and Evaluation of Internal Control (SAP 54), which was issued in‬ ‭1964, the risk model is represented for the first time as an algebraic equation. By‬ ‭way of illustration, an audit risk of 5% is mentioned. It also mentions potential‬ ‭errors (inherent risk) and the internal control measures that should prevent or‬ ‭detect such errors (internal control risk).‬ ‭Risk analysis as a model‬ ‭ or the discussion of the 'technical' risks that the accountant runs, we first consider‬ F ‭the risk that the accountant runs as an entrepreneur. It becomes this risk called‬ ‭'enterprise risk'. The accountant can limit this risk by: pursuing an adequate‬ ‭c ommercial and personnel policy.‬ ‭The latter is done, among other things, by: setting up a good internal organization.‬ ‭In a more general sense, after the risks have been estimated (implicitly or‬ ‭explicitly), it is decided to reduce the risk:‬ ‭-‬ ‭To avoid;‬ ‭-‬ ‭To accept;‬ ‭-‬ ‭To be transferred (to be‬ ‭-‬ ‭insured); To decrease.‬ ‭ he audit risk (AR) is the risk that the accountant issues an incorrect audit opinion on‬ T ‭annual accounts that contain material inaccuracies or omissions. In the risk analysis‬ ‭model, the relationship between the AR and the sub-risks to be discussed below is as‬ ‭follows shown:‬ ‭AR = IHR * ICR * DR‬ ‭AR =‬‭IHR = ICR =‬‭DR =‬ ‭ ccounting risk; risk that an incorrect‬ A ‭auditor's report is issued. Inherent‬ ‭risk; sensitivity of‬ ‭balances/transactions if there is no‬ ‭internal control.‬ I‭nternal control risk; the risk that errors are not‬ ‭detected in a timely manner by internal controls.‬ ‭Detection risk/residual risk; the risk that errors are not‬ ‭discovered despite an audit.‬ ‭ he first factor in the risk analysis model concerns the inherent risk (IR). This is‬ T ‭the sensitivity of balances or types of transactions to inaccuracies, which may be‬ ‭material both individually and together with inaccuracies in other balances and‬ ‭transactions, assuming that no internal control measures were applicable to them‬ ‭(RL 400, NIvRA 1996). The inherent risk is influenced by:‬ ‭-‬ ‭General characteristics of the sector of the household to be audited.‬ ‭-‬ ‭Characteristics of specific transactions or items.‬ ‭ he second factor from the risk analysis model is the internal control risk (ICR). This is‬ T ‭the risk that inaccuracies, which may occur in balances or types of transactions and‬ ‭which, individually or together with inaccuracies in other balances or transactions, may‬ ‭be of material importance, are not prevented or discovered and corrected in a timely‬ ‭manner by the system of measures of administrative organization and internal control‬ ‭(RL 400, NIvRA 1996). Although the IR and the ICR are often determined separately at‬ ‭the level of transactions within business processes (and control objectives), these‬ ‭estimates cannot be viewed entirely separately. It can hardly be expected from the‬ ‭entrepreneur that if the IR is very low, an extensive system of internal control has been‬ ‭set up. The accountant must therefore view the design of this system in the light of the‬ ‭estimated IR. In other words, very low inherent risk requires a limited system of internal‬ ‭control. A limited system of internal control does not necessarily mean this a “high”‬ ‭internal control risk. The combined IR and ICR is also called the 'risk of major error'.‬ ‭ he third and final factor from the risk analysis model is the detection risk (DR). This is‬ T ‭the risk that the auditor's substantive procedures will not detect any misstatement that‬ ‭exists in a balance or types of transactions and that, individually or together with‬ ‭misstatements in other balances or transactions, may be material ((RL 400) NIvRA 1996‬ ‭).‬ ‭ imitations of the risk analysis model‬ L ‭A balanced discussion of the risk analysis model entails paying attention to some‬ ‭c ritical comments. These comments arise from a discussion conducted in the‬ ‭Netherlands by Wilachut (1990) and Ten Wolde (1991). The argument against‬ ‭applying the risk analysis model is that limiting the control effort, based on the‬ ‭estimated inherent risk and internal control risk, can be dangerous. An overly‬ ‭optimistic estimate can lead to a reduction in audit work, which reduces the chance‬ ‭that the overly optimistic (i.e. incorrect) estimate will come to light during the audit‬ ‭process. The potential for incorrect estimation of inherent and internal control risk‬ ‭c an be managed by designing a structured audit approach that includes decision‬ ‭support tools and guidance for estimation.‬ ‭ ome hesitation to use the risk analysis model stems from the idea that the so-called‬ S ‭professional judgment process through the use of “models and (calculation) rules” will hit‬ ‭the background. In this view, the application of risk analysis turns the control process into‬ ‭a rigid and mechanical process. This fear seems unfounded because professional‬ ‭judgment also plays a central role in the application of the risk analysis model.‬ ‭The comments made do not materially affect the risk analysis model.‬