Auditors would use the enterprise risk model:
Multiple Choice?
A to determine detection risk.
B to evaluate management’s risk assessment.
C to reduce the client’s business risk.
D to monitor client risk.
The correct answer and explanation is :
The correct answer is:
B. To evaluate management’s risk assessment.
Explanation:
Auditors use the Enterprise Risk Model (ERM) primarily to evaluate management’s risk assessment because it provides a structured framework to identify, assess, and manage risks that could impact an organization’s objectives. The ERM model, commonly associated with the COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework, enables auditors to understand how a company identifies and mitigates risks, including financial, operational, strategic, and compliance-related risks.
Why B is Correct:
- Assessing Management’s Risk Process – Auditors examine how management identifies risks, assigns priorities, and develops strategies to mitigate them. This helps in determining whether the company’s risk management practices are effective.
- Internal Control Evaluation – The ERM model allows auditors to assess internal control structures, ensuring they align with the company’s risk appetite and objectives.
- Regulatory Compliance – Management’s risk assessment is crucial for meeting legal and regulatory requirements, and auditors ensure that proper compliance mechanisms are in place.
Why the Other Options are Incorrect:
- A (To determine detection risk) – Detection risk relates to the auditor’s ability to detect material misstatements in financial statements, but ERM is more focused on business-wide risk assessment rather than specific audit procedures.
- C (To reduce the client’s business risk) – While auditors provide insights on risk management, reducing business risk is management’s responsibility, not the auditor’s.
- D (To monitor client risk) – Auditors assess risks, but continuous risk monitoring is the duty of the client’s internal risk management team.
By leveraging ERM, auditors ensure that management has an effective approach to risk assessment, which is critical for financial reporting integrity and operational stability.
Here is an image to represent Enterprise Risk Management (ERM) and its role in auditing:
Here is an image representing Enterprise Risk Management (ERM) and its role in auditing. It illustrates an auditor reviewing the risk assessment framework with a team in a professional business setting. Let me know if you need any modifications or additional details!