Risk Based Audit Approach – What Does It Mean?

We use a risk based approach to audit a company's year-end financial statements, but the term " risk based audit approach" can sound like the latest in business buzzwords similar to holistic, innovative and mission critical.

The substance behind the term "risk based approach" comes from Canadian Auditing Standards, the standards Canadian accountants apply when performing an audit. In fact, the standards dedicate a section to risk assessments: "CAS 315 Identifying and Assessing the Risks of Material Misstatement."

Internal and External Risk Assessments

What does a risk based audit approach mean? We do a risk assessment during the planning phase of an audit looking for both financial reporting risk and business risk. Financial reporting risk is when a company's financial statements don't reflect the company's operations and users of the statements rely on the inaccurate portrayal to make decisions.