Why Risk-Based Audit Is Beneficial for a Business Enterprise

The advantages of a risk-based audit approach for your business

Auditor explaining the advantages of a risk-based audit approach to a business enterprise
Photo by LinkedIn Sales Solutions on Unsplash

Many people can be easily disheartened whenever they hear about risk-based audit. To many, this sounds like a very complex business jargon that’s both hard to understand and quite expensive to implement. But once we begin to understand the importance of this kind of approach to audit, we’d realize how little we may need to spend versus the losses we could incur if we fail to establish an effective risk-based framework for our enterprise.

Here are just some of the benefits of a risk-based audit to your business:

1. It can prevent asset misappropriation

Asset misappropriation occurs whenever an employee uses the company’s assets for his personal benefits other than for business purposes.

This is more than your normal theft of cash such as when someone happens to open your cash register and steals the money there. This can also happen when an employee declares certain expenses such as travel or representation expense but uses the funds for his own pleasure or enjoyment.

2. It can prevent corruption

This is especially true in the case of company employees in high positions.

They can use their positions of power in acts involving extortion and bribery. What’s worse is if they use confidential business information to gain personal monetary benefits. This includes acts of abuse in power and may cost the business large losses such as when managers secure a contract with services that are far more expensive than necessary.

3. It can prevent financial statement fraud

Misrepresentations in the company’s financials statements would affect not only the company’s shareholders. Deceit in the company’s financial statements would mislead decision-makers relying upon them. It can even risk sanctions and lawsuits from authorities.

4. It can prevent losses due to operational inefficiencies

The presence of bad intentions is not the only thing that can be detected by a risk-based audit.

The company managers and employees may be working honestly and cooperatively, but if there are critical risks in the business operations that are not identified, assessed and managed in due time, this could also cost the company in terms of huge losses.

Company equipment can deteriorate faster or even malfunction. Business operations can even shut down in the long run.

5. It can prevent threats to cyber security

Threats to a company’s cyber security are no longer an isolated area where the Information Technology or IT department is concerned. Cyber security threats affect the business entity as a whole and if not managed properly as identified and evaluated through a proper risk-based approach, this can create an immense and irreversible impact on the business enterprise.

The smallest and seemingly harmless act such as an employee posting information about the company via social media can cost the company millions if the risk is not identified early enough. There should be proper dissemination of vital policies applying to cyber security and internet use to prevent such losses from affecting the company.

Final words

The advantages of a risk-based audit to a business enterprise need to be conveyed not only to top managers but to everyone who works in the company. An awareness of the risks that may be present, as well as the possible losses that may be incurred if risks are not identified, assessed and managed, can help business workers appreciate the value of an effective risk management framework.

Business managers can then understand their role not only as key officers who handle the different operations of the business but as risk managers who are accountable to implement risk management processes in order to achieve the objectives of the business enterprise.

Before her career as a freelance writer, Jocelyn Soriano worked as a risk-based auditor. She graduated Summa Cum Laude with a degree in Bachelor of Science in Accounting and later passed the CPA Board Examinations. You can learn more about her at her LinkedIn Profile.

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