A3 (7) - Responding to The Assessed Risk of Material Misstatment

Question 1

Overall Response to Financial Statement Level Risk

Answer 1

1. Communicate to the audit team an increased need for professional skepticism
2. Assign staff with more experience or specialized skills
3. Incorporate a greater level of unpredictability into the audit

Question 2

Response to Risks at the Relevant Assertion Level

Answer 2

There should be a clear linkage between the assessed level of risk at the relevant assertion level and the nature, extent, and timing of further audit procedures,
including tests of controls and substantive procedures.

Question 3

Audit or Risk assessment approach - (Control risk matrix)

Answer 3

The Relation among following factors:-

1) . Status of internal control (Weak, Some and Strong)    2) . Risk Level (High, Medium, and Low)    3) . Perform Control Test ( No. Yes, Yes)    4) . Perform Substantive Procedures (  less - Maximum)

Question 4

When to Perform Tests of Controls

Answer 4

a) The auditor’s risk assessment is based on the assumption that controls are operating effectively, or
b) . When substantive procedures alone are insufficient (I.e., when the entity makes extensive use of information technology).

Question 5

Test of Controls methods

Answer 5

1- Inquiry
2- Observation
3- Inspection,
4- Reperformance.

Question 6

Test of Controls Considerations

Answer 6

1. The frequency of the performance of the control
2. The length of time for auditor wishes to rely on the control.
3. The relevance and reliability of the evidence
4. The extent to which the auditor wishes to rely on the operating effectiveness of the control to reduce substantive procedures.
5. The expected deviation rate from the control

Question 7

Test of controls Timing

Answer 7

Controls that are tested only during an interim period should be supplemented by additional evidence for the remaining period

ONE TIME TESTING :- related to period-end controls, such as tests of controls over INVENTROY COUNT.

PERIOR AUDIT about the operating effectiveness of controls may be used in the current audit

CHANGE IN CONTROLS operating effectiveness must
be retested in the current period

Operating effectiveness must be tested at least
once every third year.(even there is no change).

Question 8

Test of Controls Results

Answer 8

1- Operating effectively and can be relied up
2- Not operating effectively - ore reliable and extensive
substantive procedures.

Question 9

Substantive tests Types

Answer 9

1- Tests of details

2- Substantive analytical procedures

Question 10

Substantive Procedures Timing

Answer 10

a) .The longer the period between the interim date and period end, the greater the risk.

Question 11

Sufficiency and Appropriateness of Evidence

Answer 11

1. Significance and likelihood of potential misstatements.
2. Effectiveness of controls.
3. Experience gained during previous audits.
4. Results of audit procedures performed.
5. Source, reliability, and persuasiveness of evidence
6. Understanding of the entity and its environment

Question 12

Documentation required

Answer 12

1- The overall response addressing assessed risk at the financial statement level.

2- The nature, extent, and timing of audit procedures.

3-The linkage of those audit procedures with assessed risks at the relevant assertion level.

4- The results of audit procedures.

5- The conclusions reached regarding the use of prior period audit evidence in evaluating the current operating effectiveness of controls