Smart Risk Management

10

Risk Management and the Management Accountant

After reading this chapter, you should:

• recognise the impact that risk management is having on the accounting profession.

• add value to the discussion of risk for your clients or your employer.

• be able to use your understanding of the path of least resistance principle to isolate inherent and detection risk.

The Demand for Our Risk Awareness

As auditors and business advisors, we must recognise that our role includes providing assurance that controls are in place, and thus detect and monitor problems.

In the accounting profession, we place these risks into three categories:

• Inherent risk

• Control risk

• Detection risk

Most businesses do somewhere between a good to an adequate job of addressing their control risk. Internal controls, internal audits, and the like help leaders and boards of directors examine the checks and balances that need to be in place to hold people accountable.

Yet, breaches of ethics and rash decision-making occur most often because accounting firms and their clients’ leaders fail to adequately address the first and third risks. Why? Because we also follow the path of least resistance and focus too much attention on control risk.

Inherent Risk

Inherent risk is the susceptibility of a leader’s assertion to a material omission or misstatement. The risk of such an omission or falsehood is greater for some assertions and types of transactions than for others. The primary cause of inherent risk may be both from internal ...