What Is a Residual Risk and Why Should the Auditor

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Examlex · Accepted Answer

The Answer is a. A residual risk is a strategic or process risk that is either uncontrolled by the organization and/or exhibits quantifiable warning signals that the risk is an imminent problem. The auditor must analyze the current conditions to determine whether the any residual risks pose a significant threat to the organization. Not all risks represent immediate problems-either because they are adequately controlled and mitigated or conditions are not currently conducive for the risk to cause damage to the organization. Of the residual risks, the auditor needs to identify and focus attention on those risks that relate to financial reporting.
b. Auditors must investigate residual business risks because they represent the most likely source of problems for the company and the most likely source of problems for the audit. Significant residual risks reflect conditions where the auditor will need to focus more attention in the audit. When an organization is effectively managed and highly controlled, it is less likely to exhibit the types of problems that result in audit problems, such as misstated financial reports, fraud, or bankruptcy. Under these circumstances, an auditor is justified in using less extensive audit procedures for areas where there are no significant residual risks, or using focused tests in areas where residual risks are localized.
c. Therefore, the auditor's examination of residual risk may identify likely problems or it may help the auditor determine that less extensive audit procedures are required in some areas.

What Is a Residual Risk and Why Should the Auditor

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