Study On Application Of Contemporary Risk-Based Audit By Small & Medium Accounting Firms

In accordance with the Professional Code of China's CPA, contemporary risk-based audit technique has been applied to financial statement audit of all enterprises from January 1, 2007. Among Chinese accounting firms, most are small and medium ones. However, small and medium enterprises are main customer group of small and medium accounting firms. Living environment, management base, growth process and market competition policies of small and medium enterprises are different from large ones. It attracts much attention from audit theory and practice circles that how small and medium accounting firms apply contemporary risk-based audit technique to their main client group, i.e., small and medium enterprises. Based on this background, this paper tries to make a systematic and significant study on application of contemporary risk-based audit technique by small and medium accounting firms to small and medium enterprises by reference to up-to-date research findings both at home and abroad from the point of view of CPA's financial statement audit.This paper contains four parts. The structure and contents are as follows:ChapterⅠ: Application environment of contemporary risk-based audit by small and medium accounting firms. This chapter illustrates the macro, micro, meso and micro environment where contemporary risk-based audit is applied. It believes that the application of contemporary risk-based audit by small and medium accounting firms is the requirement of change in audit environment, and it is a process of self-adjustment of small and medium accounting firms. This chapter is divided into three sections. At first it discusses the macro environment where contemporary risk-based audit is applied by small and medium accounting firms. This section selectively analyzes the economic, technical and legal system factors, accounting trust and management fraud that form macro environment of audit. Secondly, along with the change in management system of accounting firms of our country, new accounting firms are continuously established. Accounting firms that do not adapt to development will gradually disappear. Competition among accounting firms is increasingly fierce. To deal with fierce internal and external competition, contemporary risk-based audit technique emerges as the times require. Industrial environment and audit technical environment form mess environment where contemporary risk-based audit is applied. Thirdly, contemporary risk-based audit by small and medium accounting firms mainly targets small and medium enterprises. Characteristics of small and medium enterprises form the foremost micro environment of audit by small and medium accounting firms.ChapterⅡ: Application of contemporary risk-based audit technique by small and medium accounting firms. At first, this chapter analyzes the basic principle of contemporary risk-based audit by taking BMP as an example. After the basic principle is clear, the author illustrates the Risk management-based audit frame for contemporary enterprises put forward by Zhuo Jimin in 2005 in China and the basic frame of On the contemporary business risk based auditing put forward by Cai Chun and Zhao Sha in 2006 so as to lay a foundation for the application of contemporary risk-based audit by small and medium accounting firms. Secondly, this chapter illustrates risk assessment procedures of the application of contemporary risk-based audit technique. When carrying out risk assessment procedures for small and medium enterprises from six aspects, small and medium accounting firms must take account of the characteristics thereof. Thirdly, this chapter illustrates further audit procedures for application of contemporary risk-based audit technique. Small and medium accounting firms must plan further audit procedures at the overall financial statement level and assertion level by using risk assessment conclusions, and select the comprehensive approach or substantive approach appropriately according to the risk of material misstatement at the assertion level. In substantive procedures, it must consider six aspects where risk of material misstatement may occur in small and medium enterprises.ChapterⅢ: Case of contemporary risk-based audit by small and medium accounting firms. At first, this chapter introduces the scope of business, organization, business premises, equity structure and financial status of the application object A Trade Co., Ltd. Secondly, it illustrates the contemporary risk-based audit procedures of A Trade Co., Ltd. To implement contemporary risk-based audit for A Trade Co., Ltd, it must recognize the management model of retail sector and understand the characteristics thereof. Risk of material misstatement is assessed from six aspects, including the environment of retail sector, business strategy, nature of organization, etc.. In this audit case, sales link is a recognized high risk area of the material misstatement, and the audit procedures for comprehensive approach are set forth. Thirdly, three conclusions may be drawn by summarizing the audit case of A Trade Co., Ltd. 1) The influential direction and degree of the six aspects on risk assessment conclusions of material misstatement is different. Risk of material misstatement cannot be assessed correctly unless comprehensive consideration has been given; 2) Contemporary risk-based audit places emphasis on audit data collection outside of the financial system. Combination of financial and non-financial data helps to reach correct audit conclusions; 3) In contemporary risk-based audit, auditors test the assertion of all transactions, account balance, presentation or disclosure not in a balanced manner. It helps to improve the audit efficiency that auditors implement relatively detailed audit procedures for important assertions of high risk areas where material misstatement may occur.ChapterⅣ: Countermeasures for contemporary risk-based audit for accountants of small and medium firms. At first this chapter discusses the problems regarding the application of contemporary risk-based audit that small and medium accounting firms face. When certified public accountants do not possess complex knowledge structure, or cannot effectively use information technology, or cannot properly grasp the degree of complexity of risk assessment procedures for small and medium enterprises, it may impede the application of contemporary risk-based audit. Therefore, it is favorable for generalizing contemporary risk-based audit among small and medium accounting firms to upgrade the complex knowledge structure of certified public accountants, generalize computerized audit technique, compile risk-based audit guide, carry out peer review and improve legal environment for audit. The author thinks that following innovation has been made in analysis in this paper:1. This paper goes deep into the problem of"Application of contemporary risk-based audit by small and medium accounting firms", and studies the theory and application from the point of view of small and medium enterprises. This paper summarizes the contemporary risk-based audit by starting with the application environment of audit technique, and with the point view of audit frame both at home and abroad, and with the professional code of China's CPA.2. This paper illustrates the application process of risk-based audit by using a specific audit case. By summarizing the application process of the audit case, it reaches three major conclusions, which have certain revelation on how small and medium accounting firms apply contemporary risk-based audit technique.3. This paper analyzes the problems in application of contemporary risk-based audit technique by combining the practical situation of small and medium accounting firms and small and medium enterprises, and put forward relevant countermeasures.