A CONCEPTUAL MODEL FOR LINKING BUSINESS RISK WITH AUDIT STRATEGY

Although there is much debate in the financial audit literature about how beneficial was the change from the traditional substantive audits to Business Risk Audit (BRA) methodologies, there is little doubt that most of the large-scale audits performed nowadays are based on BRA methodologies. This is mainly due to the large audit firms promoting the shift to the new methodologies in their pursuit of widening their area of expertise and to audit standards such as ISA 315 or SAS 109 that require auditors to understand how business risk may lead to material misstatements in the financial statements that are being audited. After presenting a brief history of Business Risk Audit (BRA) methodologies and a review of their pros and cons according to the latest audit literature, this paper focuses on one of the key issues identified by various authors regarding BRA methodologies: linking business risk with audit risk. While in theory it is reasonable to conclude that business risk has an impact on audit risk, studies have shown that even experienced professionals are reluctant to give an audit opinion on financial statements based on indirect evidence drawn from analysis concerning business risks and the operation of high level controls. A conceptual model is proposed for depicting the relationship between business risk, fraud risk, audit risk and the audit strategy. The author argues that the proposed model could be used in finding an optimum mix of tests of controls and substantive audit procedures that would enable auditors to reaching their goal of obtaining a reasonable level of assurance that the financial statements give a true and fair view in accordance with the financial reporting framework.