Chapter 7: Assessing Business Risks and Linking Business Risks to the Audit

Question 1

Steps to make necessary risk assessments

Answer 1

1) Understand nature of client’s operations, industry, and environment it operates in, 2) Identify business risks that face company, 3) Assess the significance of identified risks, 4) Assess adequacy of controls in place to mitigate risk, 5) Perform residual risk analysis

Question 2

Business risks

Answer 2

any risks that threaten to inhibit the company from achieving objective

Question 3

What is used to assess significance of business risks?

Answer 3

Probability of risk materializing (relatively probable) and magnitude of loss if risk were to materialize (somewhat severe)

Question 4

Residual risk analysis

Answer 4

auditor identifies risks that could impact f/s that are not sufficiently controlled

Question 5

Organizational Business Model

Answer 5

framework auditors use to understand nature of clients business

Question 6

Components of Organizational Business Model

Answer 6

1) Markets, Customers, and Suppliers, 2) Competitors, 3) Resources and Suppliers, 4) Internal Processes, 5) External Agents, 60 Strategic Partners

Question 7

Products

Answer 7

tangible goods and services company sells

Question 8

Markets

Answer 8

discernible segments in which organization chooses to compete

Question 9

Customers

Answer 9

people that buy your products and services

Question 10

Direct competitor

Answer 10

external organization targeting a similar set of markets, customers, and products

Question 11

Indirect competitor

Answer 11

external organization that competes for customers but has different products or might target different market

Question 12

Strategic Management

Answer 12

activities that set direction of organization

Question 13

Primary Processes

Answer 13

most directly associated with creating value in organization

Question 14

Support Processes

Answer 14

support primary processes and indirectly related to creation of value in organization

Question 15

External Agents

Answer 15

groups and organizations outside of an organization that have direct impact on organization’s ability to succeed

Question 16

Strategic Partners

Answer 16

external entities that organization has formal relationship with to advance joint objectives

Question 17

Factrs of External threat analysis

Answer 17

1) Industry forces, 2) Macro-environmental factors

Question 18

Industry Forces

Answer 18

1) Competitors, 2) New Entrants, 3) Substitutes, 4) Suppliers, 5) Customers

Question 19

Risk of competitors

Answer 19

risk that existing competitors will take organization’s market share by offering superior products, better service and better prices

Question 20

Risk of new entrants

Answer 20

risk that new competitors will enter market and reduce market share and profit margins

Question 21

Risk of substitutes

Answer 21

risk that superior product will be developed which makes your client’s product obselete

Question 22

Risk of suppliers

Answer 22

risk that organization could face increased costs or restricted access to required raw materials and inventory

Question 23

Risk of customers

Answer 23

risk that customers will be able to demand unprofitably lower prices

Question 24

Macro-environmental Forces

Answer 24

1) Political threats, 2) Economic threats, 3) Social threats, 4) Technological threats

Question 25

Political threats

Answer 25

risk of regulatory and legal restraints on organization

Question 26

Economic threats

Answer 26

general economic risks organization faces

Question 27

Social threats

Answer 27

risk of customers boycotting or avoiding business because do not approve of policies relating to wide array of factors

Question 28

Technological threats

Answer 28

risk that organization’s technology will become obsolete and impair organization’s ability to compete in industry and environment

Question 29

Implications of external risks

Answer 29

Audit expectations, client viability, and risk of material misstatement may change