Methodology for Evaluating the Risks of Activities Termination, Related with Ineffective Company Management

The author analyses and sums up methodological approaches to evaluating the risks of activities termination, related with ineffective company management, by an auditor. Emphasis is made on identification of problems involved in evaluation of company management effectiveness. A parametric model for management system is built. It is demonstrated that evaluation of the audit risk of ineffective management is a key component (on account of its large share) in evaluating the implicit audit risk related with termination of company’s activities in the foreseeable future, and it can be taken as a proof to the correctness of using the assumption on continuity by management personnel when preparing financial reports. When the above problems are studied in the audit context, the issue of evaluating the effectiveness of management system and the related risks is quite complicated, because this evaluation cannot be always made by direct way due to the lack of formalized results from quantitative evaluation by type of work. This raises the need for elaboration of a methodology and adaptation of the existing auditor procedures to evaluation of the risks related with ineffective operation of management system. The objective of the article is to study methodology for evaluating the risks of activities termination, related with ineffective company management. The problem’s importance is substantiated, with demonstrating that methodological approaches practiced by audit today require further development and improvement. The proposed approach enables for finding the reasonable relative magnitude of the audit risk of indetection, which becomes a key factor in planning the scopes, terms and contents of auditor procedures.