Risks Auditors Face When Considering Management Earnings Management Pr

The earnings management involves the following:

1. Revenue recognition
2. Changes in the estimates
3. Abuse of the concept of materiality
4. Capitalisation and deferral of the expenses
5. Non- GAAP measures. (KPMG, 2015)

Risk is defined as the likelihood of the things not going as per planned.

The SAS 300 identifies the following components of risk.

Inherent risk is defined as the susceptibility of mistakes or the misstatement in the balances or the transactions or the class of transactions, even there is a presence of an internal control.

Control risk is defined as the presence of the material misstatement that was capable of being detected by the internal control system.

The detection risk is concerned with the risk wherein the auditors extend the substantitiave procedures but that fail to detect the material misstatement.

The sum total of all the above stated 3 risks is the audit risk. (University of Glasgow, 2015)

The following are some of the qualities that an auditor must possess:

1. Professional scepticism: an auditor must possess some professional scepticism so that he can assess the risk and accordingly, extend the audit procedures.

2. Evaluate the accounting policies: an auditor must select and apply the accounting policies when it comes to assessing the risk of the fraudulent financial reporting

3. Assess the completeness of the disclosures

4. The audit report presented must be fair and adequate so as to bring to notice all the issues and the same must be presented and brought to the notice of the stakeholders.

5. The issues must be reported to those charged with governance

Other reporting responsibilities: this includes the fact that where a fraud have occurred, the auditor must consider the other reporting responsibilities. These responsibilities could include the communication with the regulatory and the enforcement. (ACCA Global, 2015) 

Function of an audit:

An auditor has to ensure that the financial statements have been prepared in accordance with the generally accepted principle of accounting and he further has to obtain enough evidences that the financial statements represent a true and a fair picture of the financial position of the company. He must ensure his independence when he is expressing his opinion since he is entrusted with the responsibility of giving an unbiased opinion on the fairness and the adequacy of the financial statements.

Also, the auditors have to ensure their objectivity with those with the governance and fulfil their responsibility of analysing, evaluating, assuring and making the recommendations and provide the other information to the management of the entity. (AICPA, 2015) 

References:

https://www.accaglobal.com, A. (2015). Massaging the figures | ACCA Qualification | Students | ACCA Global. Accaglobal.com. Retrieved 26 January 2015, from https://www.accaglobal.com/in/en/student/acca-qual-student-journey/qual-resource/acca-qualification/p7/technical-articles/massaging-the-figures.html

https://www.accaglobal.com, A. (2015). Massaging the figures | ACCA Qualification | Students | ACCA Global. Accaglobal.com. Retrieved 26 January 2015, from https://www.accaglobal.com/in/en/student/acca-qual-student-journey/qual-resource/acca-qualification/p7/technical-articles/massaging-the-figures.html

www.aicpa.org, (2015). AU Section 322 the Auditor€™s Consideration of the Internal Audit Function in an Audit of Financial Statements. Retrieved 26 January 2015, from https://www.aicpa.org/research/standards/auditattest/downloadabledocuments/au-00322.pdf

www.aicpa.org, (2015). Generally Accepted Auditing Standards. Retrieved 26 January 2015, from https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00150.pdf

www.kpmg.com, (2015). Current and Emerging Issues. Retrieved 26 January 2015, from https://www.kpmg.com/RU/en/topics/Audit-Committee-Institute/Publications/Documents/toolkit/5_Current%20and%20Emerging%20Issues_eng.pdf