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Business risk in simple words is the risk that entity might not be able to achieve its objectives and strategic targets. One of the easiest to understand is to maximize profits. But it is not the only objective entity has to meet. Another important objective is reporting correct information regarding financial performance, financial position and cash flows of entity to the users of financial statements. Entity’s inability to achieve its objective may arise due to the factors external or internal to entity. According to International Auditing Standards (ISAs) business risk has been defined as:
A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.
So we understand that business risk may arise due to two reasons:
·Significant conditions that seriously limit entity’s ability to achieve its objectives
·Setting inappropriate objectives
Benefits of the business risk approach to auditing:
1. It will tend to provide information that is more useful to the client.
2. It forces the auditor to have a more complete understanding of the business and it will therefore be more unlikely that any fundamental issues will be overlooked.
3. It puts more emphasis on the strategic focus of the business and on the quality of management.
4. It is less easy for the client to anticipate and thus circumvent tests to be carried out by the auditor.
5. The auditors able to provide justification for the work carried in case the lawsuit against the auditor for negligence.
6. This approach helps the auditors to identify high-risk areas where more work should be performed and low risk areas, where little or no audit work will be carried out.
7. More efficiency way of conducts an audit it helps to eliminate under or over auditing.
