Auditing is actually one of the most important processes that business owners can do. This is where the company in question is held accountable and that all of the business processes will be put into light so that it will shed important information that can help influence the decision of the company owners.
That being said, there are two types of auditing: internal and external. The latter is where the company itself conducts the auditing themselves. This can be quite problematic given that the auditors might be biased in giving information that will put the company in good graces (even though the financial reports state otherwise).
External audits are done by an external company- either from an auditing firm or an accounting services company in Malaysia.
But, even though external audits may prove to be more transparent and trustworthy than internal ones, there are also some risks associated with it as well. I will cover all of them in this article, so if you are interested to know, do read further.
This refers to the risk of an employee carrying out executive functions that they are not authorized to do in the first place. Control risk, you could say, is a misstatement in the financial reports of the company as a result of a failure in internal business processes.
Auditing bodies might file to audit the company’s risk management procedures and that they fail to implement effective internal control mechanisms to give more accurate financial reports.
In extreme cases, external auditors might find that the company does not have the proper culture of the chain of command that will act on certain processes based on authority.
This type of risk is something that is beyond the control of external auditors. For example, the company might have done business deals where there is already an inherent risk in the transaction itself- something that cannot be undone at a later time.
Some sources of this type of risk include complex business transactions that may involve derivative instruments, the company’s inability to adhere to current trends and standards set by the industry sector it is in, transactions that require high levels of judgement which may lead to not identifying all of the risk factors, among many others.
This is arguably the worst type of risk and it is characterized by the external auditor’s inability to find any errors (even if there are) in the company’s financial statements. This can lead to incorrect opinions and non-objective reviews.
This can be a result of poor audit planning, poor interaction with the different departments with the organization in question, a poor understanding of the business processes, and incorrect assumption of sample sizes.
How Do You Minimize Audit Risks?
- Sufficient time must be allotted for auditing
- Auditing teams should have sufficient knowledge of the company, as well as the industry sector it is in
- Should be able to communicate with the different departments within the company in question
- Should use proper sampling techniques
- Should conduct an accurate assessment of the client’s business across the board.