Proposed Analytical Framework to Assess Audit Risks

Wenmin Luo

doi:10.4236/ojacct.2021.102005

Abstract

The risk-oriented audit approach has been being applied in China since 2006 when Chinese Certified Public Accountants Auditing Standards (CCPAAS) was issued by the Chinese Institute of Certified Public Accountants (CICPA). However, most small-and medium-sized CPA firms in China still have difficulty in assessing the audit risk in accordance with CCPAAS with efficient and effective analysis and analytical procedures. Also, there are few studies introducing how to apply analysis and the analytical procedures with the risk-oriented audit approach as it requires external assistance and complex computer procedures. Therefore, this study aims to establish an analytical framework on how to apply analysis and the analytical procedures efficiently and effectively for small-and medium-sized CPA firms in China. It is based on DuPont model assessing the rationality of indicators, which is familiar to the financial officers and auditors. It proves that such an analytical framework is simple to perform since it can easily combine the information based on strategic analysis, business analysis and the analysis of financial statement from personalized audit and audit staffs at all levels can work with it. Under the premise of ensuring the quality of audit, this analytical framework can improve audit efficiency and reduce audit costs that most small-and medium-sized CPA firms need badly when facing challenges.

Highlights

IntroductionThe auditor shall assess the amount of assurance of the Inherent Risk (IR) and Control Risk (CR) through the control testing, determine the Detection Risk (DR) with the audit model according to the acceptable audit risk and guide further audit work, the substantive testing
The risk-oriented audit approach has been being applied in China since 2006 when Chinese Certified Public Accountants Auditing Standards (CCPAAS) was issued by the Chinese Institute of Certified Public Accountants (CICPA)
The auditor shall assess the amount of assurance of the Inherent Risk (IR) and Control Risk (CR) through the control testing, determine the Detection Risk (DR) with the audit model according to the acceptable audit risk and guide further audit work, the substantive testing

Summary

Introduction

The auditor shall assess the amount of assurance of the IR and CR through the control testing, determine the DR with the audit model according to the acceptable audit risk and guide further audit work, the substantive testing. Most firms treat the IR and CR, which are controlled by clients, as high or at maximum even 100%, skip the control testing and directly implement substantive testing This measure can possibly meet the requirement of auditing standards more efficiently than assessing the IR and CR before substantive testing because of reduction in procedures of assessing the IR and CR. More time and energy are devoted into the substantive testing to ensure the lower detection risk, which represents acceptable audit risk It seems to have met requirements of the format, but it does not in terms of its content

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Conclusion