Exchange Rate Risk

The uncertainty of returns for investors that acquire foreign investments and wish to convert them back to their home currency. This is particularly important for investors that have a large amount of over-seas investment and wish to sell and convert their profit to their home currency. If exchange rate risk is high - even though a substantial profit may have been made overseas, the value of the home currency may be less than the overseas currency and may erode a significant amount of the investments earnings. That is, the more volatile an exchange rate between the home and investment currency, the greater the risk of differing currency value eroding the investments value.

Market Risk

The price fluctuations or volatility increases and decreases in the day-to-day market. This type of risk mainly applies to both stocks and options and tends to perform well in a bull (increasing) market and poorly in a bear (decreasing) market. Generally with stock market risks, the more volatility within the market, the more probability there is that your investment will increase or decrease.

Country Risk

This is also termed political risk, because it is the risk of investing funds in another country whereby a major change in the political or economic environment could occur. This could devalue your investment and reduce its overall return. This type of risk is usually restricted to emerging or developing countries that do not have stable economic or political arenas.

Financial Risk

Financial risk is the risk borne by equity holders (refer Shares section) due to a firms use of debt. If the company raises capital by borrowing money, it must pay back this money at some future date plus the financing charges (interest etc charged for borrowing the money). This increases the degree of uncertainty about the company because it must have enough income to pay back this amount at some time in the future.

Liquidity Risk

The uncertainty introduced by the secondary market for a company to meet its future short term financial obligations. When an investor purchases a security, they expect that at some future period they will be able to sell this security at a profit and redeem this value as cash for consumption - this is the liquidity of an investment, its ability to be redeemable for cash at a future date. Generally, as we move up the asset allocation table - the liquidity risk of an investment increases.

Business Risk

The uncertainty of income caused by the nature of a companies business measured by a ratio of operating earnings (income flows of the firm). This means that the less certain you are about the income flows of a firm, the less certain the income will flow back to you as an investor. The sources of business risk mainly arises from a companies products/services, ownership support, industry environment, market position, management quality etc. An example of business risk could include a rubbish company that typically would experience stable income and growth over time and would have a low business risk compared to a steel company whereby sales and earnings fluctuate according to need for steel products and typically would have a higher business risk.

The Objectives, Extent, and Scope of Audit Procedures

Audit procedures are called audit programs by examiners, and they merely serve as guidelines and checklists of actions to perform during audit engagements. To provide an example, we focused on the details of the audit procedures for accounts receivables (AR), which we present in the succeeding sections.

In actual practice, audit techniques or styles in performing these procedures, developed by examiners through their skills and expertise, contribute largely to achieving the best audit results within a specified time frame.

The objectives, the extent, and the scope by which these procedures are performed may vary according to the role of the examiner, as internal or external auditor. These roles and objectives are discussed in full in a separate article entitled Financial Statement Audit vs. Forensic Accounting.

The term “extent” refers to the percentage of documents test-checked for completeness or for accuracy of computations involved. An AR audit program may also include the tracing of transactions from the selling point, to payment activities, up to its final disposition as a paid-account, a past due account, a doubtful account, or as a bad debt, as they are verified via random sampling of substantial balances or material amounts.

The term “scope” refers to the period covered based on cut-off dates established by the internal or external financial auditors. To fraud examiners or forensic accountants, the scope refers to the specific account(s) under suspicions of fraud--where dates could go as far back as necessary.

Audit Documentation

Documentation refers to working papers kept by the auditor as regards audit planning, procedures performed, information and explanations obtained from client and conclusions drawn from the work performed.

Objectives of Documentation:
1: Assist in planning and performance of audit
2: Assist in supervision and review of audit work
3: Record the audit evidence resulting from the audit work performed to support the auditor's opinion , including representation that the examination was conducted in accordance with the International standards on auditing…!

Risk Assessment

Risk analysis is the process of defining and analyzing the dangers to individuals, businesses and government agencies caused by potential natural and human-caused adverse and unwanted events. In IT, a risk analysis report can be used to align technology-related objectives with a company's business objectives. A risk analysis report can be either quantitative or qualitative.

In quantitative risk analysis, an attempt is made to numerically determine the probabilities of various adverse events and the likely extent of the losses if a particular event takes place.

Qualitative risk analysis, which is used more often, does not involve numerical probabilities or predictions of loss. Instead, the qualitative method involves defining the various threats, determining the extent of vulnerabilities and devising countermeasures should an attack occur.

Objectives of having an audit:

The primary objective of having an audit is to enable the auditor to form and express a professional and independent opinion on whether the financial statements give a true and fair view of the financial position of the company and of its profit and loss for the period under review.

Other objectives are;

i) To ensure that the financial statements comply with any relevant statuary requirements, e.g. Companies Ordinances.

ii) To detect fraud and error in accounting records.

iii) To provide advice to client for improvements to financial systems and controls with in the business.

iv) To prevent fraud and error and improve the efficiency of operations.