Risk-based auditing of business enterprises and its reporting

Risk-Based Auditing of Business Enterprises and Its Reporting, Ph. D. Thesis, Ankara, 2008.Due to the broadened activity areas and increased variety of products, the risks the firms encounter have dramatically increased. The global crises experienced in the world and severe competitive conditions prevailing have compelled companies and markets to take some measures. Accounting scandals and frauds which broke out in developed countries in the 2000s in particular contributed to this. In recent years it has become inevitable to conduct risk management and auditing in companies in order for them to perform a transparent reporting and inform those who require it.This study aims to demonstrate the necessity of conducting an audit with respect to risks and give explanations with regard to how this can be realized. An audit of risks is auditing continuously not only the past of a company but also the information (risks and uncertainties) regarding its future. To audit a company for risks, it is necessary to analyze the environment of the company, the sector in which it is operating and its activities altogether. And to be able to accomplish this, an independent external auditor needs to know more than accounting. The auditor should also be knowledgeable about, the information associated with business functions other than accounting; information technologies, and the relevant subjects concerned with the sector in which the company is operating and the conditions of the country.The study particularly dwells on the functions of accounting audit, the importance of the financial information and the characteristics of conventional accounting audit. Then, management risks required to be known in order to be able to conduct an audit the company for risks are explained in detail. Concepts of risk and uncertainty, types of risks and risk management applications are also explained in detail, risks being reclassified form the stand point of our dissertation.Moreover, the characteristics of auditing with regard to risk and their difference from traditional ones, legislation and applications about risk reporting and auditing in our country and the world are covered.In the final section of the study, there is an application regarding risk analysis of companies operating in manufacturing sector whose shares are traded in the Istanbul Stock Exchange. The analysis covers 20 different financial ratios belonging to 15 periods of 89 firms during 2003-2007. The application is based on multiple regression analysis which was first utilized by Edward I. ALTMAN in 1968 and then used in various studies in subsequent years. The main objective is to determine the situation of the companies in manufacturing sector and develop an advance warning system. To this end, factor analysis and discriminant analysis methods have been applied to the data obtained. As a result of the application, risk grading of companies has been made and a function has been developed for the use of the auditor to have an opinion about a new company.What is inferred from this study is that types of risks will increase as companies and economy develop. Therefore, companies need to learn to survive risks and to continuously develop methods to protect themselves from risks. To this end, each company has to form a risk management center, establish a sound internal control system and make it possible to conduct a qualified audit both internally and externally. Companies need to find out possible risks in production, marketing, human resources, finance and information technologies, take necessary precautions against them and announce these risks and the precautions to the public through annual report.In order for companies to transparently announce the data about themselves and their future risks, it is an obligation that the data be audited by independent external auditors. In conclusion, it has been observed that the reliability of the data given in the annual reports to be presented by companies can be sufficiently and effectively audited not through traditional auditing but through auditing for risks. In the coming years, the practice of auditing for risks will rapidly increase worldwide.Key Words1.Risk-Based Auditing2.Risk Reporting3.Risk Management4.Audit Risk5.International Standards on Auditing