Do you know the first question I always ask during an Audit Planning Meeting (APM)?

It’s a straightforward yet crucial one : “What is the audit risk?”

Just yesterday, I asked this question during an APM review, and the person-in-charge was taken aback when she handed over the audit file.

Let me share the key points we discussed during the meeting regarding audit risk :

✅ Company Overview
We begin by reviewing the company’s core activities and any recent operational changes that may impact the financial statements.

This includes providing an overview of the industry environment to ensure a clear context for assessing potential risks.

✅ Materiality Level
We determine and communicate the materiality threshold based on the company’s financial size and operational complexity.

This level guides the audit scope and helps focus on areas where the risk of material misstatements is higher.

✅ Significant Risk Areas
Several key areas were flagged as having elevated risks, including:

Revenue Recognition : Where timing or recognition methods could lead to material misstatements, especially with contracts or deferred revenues.

Inventory Valuation : Risks associated with slow-moving or obsolete stock or new inventory management practices.

Related Party Transactions : The potential for misstatements or inadequate disclosures, particularly regarding pricing and terms.

Going Concern : Any indicators of financial instability, such as cash flow concerns or dependence on external financing.

Litigation and Contingencies : Pending legal issues or contingent liabilities that may impact the financials.

✅ Audit Tests/Assertions
To mitigate these risks, we planned specific audit procedures, including:

Substantive Testing : For audit test in high-risk areas such as revenue recognition and inventory valuation.

Analytical Reviews : To identify unusual trends or discrepancies in revenue and expenses.

Each test is aligned with key audit assertions like valuation, accuracy, and completeness, ensuring risks are appropriately addressed.

Asking “What is the audit risk?”is not just a question—it’s the foundation of a well-structured audit plan that ensures every critical area is thoroughly examined.