The advantages of the business risk approach are as follows:
- Research showed that processing errors were rarely a cause of audit problems
- Major audit problems (e.g. companies going bust shortly after a clean audit report) typically arise out of issues such as going concern, major fraud by top management, larger scale systems breakdown etc.
- Investigation of business risk enables the auditor to have a profound knowledge of the business (as required by ISA 310 knowledge of the business).
- The approach focuses the audit on to the high risk areas which are material to the business.
- The approach adds value to the audit and enables the auditor to offer some commercial benefits to the audit.
- The previous emphasis on transactions and systems was expensive and uneconomic
- The pace of change in business and in computing and communications means that companies are much more at risk of failure than ever before.
- Auditing needs to be aware of such changes
- Audit firms wish to be in van of innovation to attract clients.
- Audit firms are anxious to show product differentiation to potential clients
- The business environment and corporate governance issues, and the nature of management control are all now more significant for and translate more quickly into the financial statements
- The approach tends to involve partners and senior mangers much more in the planning stages of an audit
- The business risk review may show up areas where the auditor can suggest that its highly paid services can be offered to the client.
Disadvantages of the Business Risk Approach
There are some disadvantages to the approach, as follows:
- More highly qualified and competent staff are required
- The added value idea does tend to oppose the notion of independence