Every business is exposed to Inherent and control risk during the execution of the day-to-day business transactions (Messier Jr& Austen, 2000). When there is material misstatement in the financial statements, the information becomes unreliable. It is therefore imperative to do a comprehensive assessment of any presented information so as to iron out any inaccuracies that might lead to misrepresentation of information in the financial statements.
The Nature of a clients’ business poses a greater risk to the exposure of Inherent and control risk. A client should ensure that the business’s transactions are not overly complex. This is because, during documentation, the complexities are likely to lead to omission of information or material misstatement in the financial statements. An auditor should understand the nature of the business and its environment when assessing such risks (Messier Jr & Austen, 2000). New business engagements by the client could also expose the business to inherent and control risks. An earlier assessment of what could go wrong during the exploration of such engagements is commendable before decisions and settlements are made. It is therefore proper for an auditor to assess the nature of engagement, possible risk exposure, and material misstatement.
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The nature of controls is also a determining factor of how exposed a business is during its transactions. There are two types of controls in any business environment; manual and computerized controls. It is easier to assess the risks associated with computerized systems as compared to manual ones. A suitable analytical procedure should be developed for the determination of possible key areas that could be exposed to misstatements during documentation of transactions (Messier Jr & Austen, 2000). Clients should employ firm internal control systems in the management of their transactions.
The data processing procedures of a company should not be too technical and complicated. This increases the risk of omission or misstatements in the financial statements. Data processing procedures should be clear and understandable, and easily auditable to verify their reliability(Messier Jr & Austen, 2000). The client should also continually evaluate whether the internal controls systems perform the functions they meant to perform. Frequent inspection of the reliability of these systems is advised to minify the client’s business exposure to Risk.
Reference
Messier Jr, W. F., & Austen, L. A. (2000). Inherent risk and control risk assessments: Evidence on the effect of pervasive and specific risk factors. Auditing: A Journal of Practice & Theory, 19(2), 119-131.
