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Posted on: October 22, 2020 by Huntersure
Risk is an ever-relevant component of any business operation. There are basic accountant risks that apply to every business in every sector, and this industry is no different. Accountants, tax professionals, and audit firms all gather, store, and process sensitive client data. But they don’t just use those numbers for crunching. They must also contend with individual and corporate clients who may be anxious about tax liabilities, a range of federal and state regulations, immovable deadlines, and ever-changing tax codes that can multiply the stress factor and open the door to potential financial, legal, and reputational pitfalls.
For insurance providers who supply accounting firms and professionals accountant professional liability coverage to protect against costlier malpractice claims, the emphasis should be on awareness and action to combat potential significant fallouts.
This risk focuses on an account that is materially misstated due to fraud or error. Inherent risk is affected by events external and internal to a company. For instance, the availability of financing or a new competitor increases the chance for inherent risk issues to occur due to factors outside the company’s control. An accounting firm’s staff’s competency is an inherent risk factor in the company’s control. If a firm has complex accounting issues, but the staff does not have the expertise and experience needed to appropriately account for these issues, then the risk of misstatement rises.
Detection risk is the chance that an auditor will fail to find material misstatements that exist in a client’s financial statements. These misstatements relate to fraud or error, and auditors use audit procedures to detect these misstatements. However, because of the nature of audits, some detection risk is always there. For instance, auditors often sample a certain kind of company transaction because examining every transaction is not practical. Increasing the sample size reduces the detection risk.
This is a risk in materially incorrect financial statements, even though the audit opinion states that the financial reports are clear of any material misstatements. An audit’s objective is to mitigate the audit risk to a low level through adequate testing and sufficient evidence. Because creditors, stakeholders, and investors rely on the financial statements to be correct, audit risk may carry legal liability for a CPA client or firm performing audit work.
This risk is the chance that a misstatement in the company’s accounting records would not be prevented or detected promptly by a firm’s internal control system to be corrected before the end of an accounting period. Keeping control risk at a low level is the responsibility of accounting management. The combination of control risk and inherent risk is the risk of material misstatement, which is the portion of audit risk that is not the accounting firm’s responsibility.
Huntersure LLC is a full-service Managing General Agency that has provided insurance program administration for professional liability products to our partners across the United States since 2007. We specialize in providing insurance solutions for businesses of all sizes. Our program features can cover small firms (grossing $2.5 million annually) to large corporations (grossing $25 million annually or more). We make doing business with us easy with our breadth and depth of knowledge of E&O insurance, our proprietary underwriting system that allows for responsive quoting, binding and policy issuance and tailored products to meet the needs of your insureds. Give us a call at (855) 585-6255 to learn more.
Posted in: Accounting