The Company of Microsoft and Risk Assessment in Accounting
According to the article found in Auditing: A Journal of Practice &Theory, entitled "Inherent Risk and Control Assessments: Evidence on theEffect of Pervasive and Specific Risk Factors," the concept of assessingthe interdependence of various risks is key to understanding the audit riskmodel of component accounting. In this model, risk is not a uniformconcept, but a series of factors. The standards of the model depict eachcomponent risk individually. However, the audit risk model will notproduce proper results unless the components are considered in relation to The authors posit as a hypothetical example two firms, A and B, withidentical control structures with respect to an audit objectives. Ifauditors consider only features of the internal controls as to the basis ofthe risks of an audit, then they will assess A and B firm's control risk asthe same. However, to use the risk model properly, the assessed controlrisk of firm A should be higher than the control risk of firm B. If thereis inherently a higher probability of more material misstatements in firm Athan in firm B, then the same control structure has a higher risk offailing to detect and correct misstatements in firm
The interdisciplinary form of component risk thus, in its applicationto Microsoft, makes the company a potential risk for an audit. Because of a company's prominence in the tech industry such asMicrosoft's, it may also attempt to minimize its risk before entering theopinion formulation state of the model. Microsoft is a highly prominentcompany, and has drawn a great deal of criticism from the federalgovernment for its supposed monopolistic violations in the past, as well asire from its competitors. "Microsoft's standing risk, as a client, to use the components of the model,may manifest a low tolerance or acceptance for risk, and keep a strict'above the board' attitude, despite its envied success within the techindustry, and allow a margin for a long-term substantial internal audit,control, and substantive testing stages, minimizing audit risk from theoutside. " Thus, to take a real-world example, Microsoft's industry and locationwithin the highly volatile 'tech sector' poses a great deal of potentialrisk in terms of receiving an audit. Remember that the definition of the concept, in very broad terms, isthat the audit risk is a risk "of a material misstatement of a financialstatement item that is or should be included in the audited financialstatements of an entity. However, there are also certain limitations of the audit riskmodel, because the combined assessment model can bring in so many factorsthat are subjective, the value of the model can become diluted-forinstance, certain strengths of Microsoft as a company may be overlooked. Instead,auditors appear to be capable of making combined assessments of thecomponent risks to appropriately plan the extent of substantive testing. This is both the power and also the weakness ofthe model. Also,because of mistrust of the tech sector in general, there is a heightenedrisk of audit for companies of the NASDAQ rather than 'blue chip'companies, because of the excesses of Tyco and WorldCom, as reported by themass media. The quick pace of the tech sectorin determining these aspects of the stages may also be mitigated by thelarger size of Microsoft. " ("Audit Risk," 2004) In this regard, "a financialstatement item includes any related notes to the financial statements. The implication is thatinherent risk need not automatically be set at a maximum (to offset apossibility that risk components will be assessed independently).
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