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Business Risk Vs Audit Risk – Key differences and considerations

What is audit risk?

Any risk that’s expressed by an auditor on the financial statements. This could be caused due to omission/manipulation in the financial statements and/or misstatements in the materials provided.

What is business risk?

Any factors that may become an obstacle in achieving an organization’s set of objectives and goals.

Elements of audit risks:

The key elements that are part of Audit Risk include:

  • Controlled risk:
    Using a company’s internal controls such as balance sheets and checks can prevent this type of risk by alerting and/or avoiding the error or fraud caused by material misstatements in the financial statements.
  • Inherent risk:
    Due to factors that do not constitute a failure of controls, the possibility of material misstatements in the financial statements due to mistakes or omissions can lead to inherent risk. This type of risk is typically higher when the organization’s transactions are very complex, and the possibility of judgment or assessment is higher.
  • Detection risk:
    Failing to find the material misstatements in the financial statements will lead to detection risk. A proper audit procedure needs to be used by the auditor to alert the error or fraud in the financial statements. Some amount of detection risk may occur due to inherent limits of audit, for instance, picking up a sample transaction for auditing. Auditors need to check the inherent and control risks of a company to understand the company more and better.

Elements of business risks:

The business risks can vary and be very diverse. The largest risk any organization may face is the probability of stopping to be of consequence. Several factors that could lead to business risks are:

  • Financial Risk:
    Issues that arise due to unplanned finances that could range from buying excessive stocks, lending credits loans, failing to recover money from the suppliers, cash shortage, and much more. If an organization deals internationally, things such as foreign currency exchange rates, and/or shipping rates could impact the finances resulting in financial risk if not planned well
  • Reputation Risk:
    This is one of the most severe risks an organization could ever face. A risk of this kind may be irrevocable and could occur due to grave consumer dissatisfaction, excessive complaints from the customers, and/or failed products. Any organization should focus on its customer base because a reputation built in years could take a very short time to destruct it.
  • Strategic Risk
    Any change that occurs due to the variation in the market, changes in consumer’s taste or any change that makes the company’s product/offerings undesirable, making them less valuable in the market, challenging their core business activities
  • Operational Risk
    Production delays, inefficient employees, damaged products, etc. could be categorized under operational risk
  • Some other risks
    Depending on the business the company is into, other unforeseen issues can be put under this category

In conclusion:

The primary difference between audit risk and business risk is based on the nature of their independent and respective risks. Inept internal and external audit porcesses result in Audit Risk. In contrast, business risk can occur due to several reasons relating to strategic, financial, operational, and reputational or any other industry-specific aspects. Both risks can have
significant adverse effects on a company. Having sound risk management practices should be in place so that risks can be identified and mitigated in a timely way.

At Spectrum Auditing, we understand your every aspect of business backed by a vast experience in advising companies, assessing and managing risks in producing favourable results. Reach us today to have your business risk and audit risk assessed. Partner with experts in the field of Audit in UAE. Reach us today for any kind of assistance, call us at +971 4 2699329 or +971 50 9866466 or email us at [email protected] to get all your queries addressed. Spectrum is your partner in your success.

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Balaram Vuchidi

Managing Director
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