BDO-SEMINAR
INTRODUCTION
Who are we?
BDO global
BDO Belgium
RECAP AUDIT METHODOLOGY
AUDIT APPROACH
Every audit firm has their own approach
Before was the starting point the financial statements, nowadays it is the risk identification.
1
, AUDIT RISK MODEL
Assessment of inherent and control risk is used to
determine the extent of procedures necessary to ensure
the detection risk balances out the equation to arrive and
an overall level of Audit Risk 5%.
more work where errors are most likely to occur
less work where errors are not as likely
key to an efficient audit
RISK OF MATERIAL MISSTATEMENT
Focus on the identification of risks of material
misstatement (RMMs). There are three types of risks:
inherent, control and business risks.
Inherent risk: the susceptibility of the financial statements to a misstatement that could be material,
either individually or when aggregated with other misstatements, before the consideration of any
related controls.
o Higher for some FSA’s and related disclosures than for others
o Higher for complex calculations such as pension fund liabilities or valuations of derivative
instruments
o Higher in areas where management can influence the reporting in the financial statements,
such as revenue recognition
Control risk: the risk that a material misstatement could occur in the financial statement that, either
individually of when aggregated with other misstatements, will not be prevented or detected and
corrected on a timely basis by the entity’s internal controls.
o Control risk has to be taken into consideration along with the circumstances in which it has
been identified.
o Control of entity doesn’t work as they should do or there is no control.
o Determine whether there is an inherent risk present that has not been considered to date.
o Example: a lack of inventory controls such that warehouse personnel could remove inventory
undetected could result in a potential RMM if the inventory were small, portable and
valuable (such as diamonds).
Business risk: related to an underlying risk, which may be of a more commercial, strategic, or
regulatory nature, rather than a risk that directly affects the financial statements.
o Determine whether there is an inherent risk present that has not been considered to date.
o Examples: providing a new good or service to the general public: this may have an impact in
terms of exposing our client to greater product liability.
Focus on risks which could realistically pose a risk of material misstatement (RMM) based on likelihood and
magnitude.
2
INTRODUCTION
Who are we?
BDO global
BDO Belgium
RECAP AUDIT METHODOLOGY
AUDIT APPROACH
Every audit firm has their own approach
Before was the starting point the financial statements, nowadays it is the risk identification.
1
, AUDIT RISK MODEL
Assessment of inherent and control risk is used to
determine the extent of procedures necessary to ensure
the detection risk balances out the equation to arrive and
an overall level of Audit Risk 5%.
more work where errors are most likely to occur
less work where errors are not as likely
key to an efficient audit
RISK OF MATERIAL MISSTATEMENT
Focus on the identification of risks of material
misstatement (RMMs). There are three types of risks:
inherent, control and business risks.
Inherent risk: the susceptibility of the financial statements to a misstatement that could be material,
either individually or when aggregated with other misstatements, before the consideration of any
related controls.
o Higher for some FSA’s and related disclosures than for others
o Higher for complex calculations such as pension fund liabilities or valuations of derivative
instruments
o Higher in areas where management can influence the reporting in the financial statements,
such as revenue recognition
Control risk: the risk that a material misstatement could occur in the financial statement that, either
individually of when aggregated with other misstatements, will not be prevented or detected and
corrected on a timely basis by the entity’s internal controls.
o Control risk has to be taken into consideration along with the circumstances in which it has
been identified.
o Control of entity doesn’t work as they should do or there is no control.
o Determine whether there is an inherent risk present that has not been considered to date.
o Example: a lack of inventory controls such that warehouse personnel could remove inventory
undetected could result in a potential RMM if the inventory were small, portable and
valuable (such as diamonds).
Business risk: related to an underlying risk, which may be of a more commercial, strategic, or
regulatory nature, rather than a risk that directly affects the financial statements.
o Determine whether there is an inherent risk present that has not been considered to date.
o Examples: providing a new good or service to the general public: this may have an impact in
terms of exposing our client to greater product liability.
Focus on risks which could realistically pose a risk of material misstatement (RMM) based on likelihood and
magnitude.
2
