Accounting: Public Sector Auditing

What is the opinion on the significance of assessing risk in the internal control process? Please raise thoughtful questions, analyze relevant issues, build on others' ideas, synthesize across readings and discussions, expand the class' perspective, and appropriately challenge assumptions and perspectives. (See below to get an idea.)

The 1st element that leads to an effective system of internal control is the control environment which serves as the foundation to all the five elements and defined as the organization's ethical climate established by leadership. Risk assessment is the 2nd element and is defined as the process to identify and analyze an organization's relevant risks to achieve its objective; it also marks the starting point to determine the way risks are managed. In performing an audit, it is vital for auditors to understand the control environment as this will define the nature and the scope of the audit. Following the understanding of the control environment, the auditor proceeds to perform a risk assessment to establish the extent of the audit testing.

In the risk assessment process, the auditor needs to understand the process management uses to identify risks and the strategies to be used to manage the risks.According to page 62, risk assessment involves a systematic and disciplined approach that is qualitative and judgmental. In the qualitative approach, management focuses on 2 factors while performing a risk assessment: the likelihood that something will go wrong if there were no control activities to prevent or reduce the risk from occurring and the impact (expressed in terms of cost or program results) of something going wrong on an organization and the people it serves. To further explain, impact in terms of cost is measurable; however, impact in program results involves the understanding of the inherent risks of the program which starts with the organization's mission, goal, and objectives. In the judgmental approach, management's experience and judgment in handling crisis is significant to decide on the actions to take to avoid volatile, unstable responses to action.