A3-Assessing the Risks of Material Misstatement

Question 1

ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

The auditor performs a series of steps in assessing the risks of material misstatement and responding appropriately to that risk (IMACPA)

Answer 1

1. Obtain an Understanding of the entity and its environment, including its internal control.
2. Assess the risks of material misstatment=id types of potential misstatement.
3. Respond to the assessed level of risk by designing further audit procedures based on this assessment
4. Test internal controls to evaluate their operating effectiveness
5. Perform substantive procedures
6. Evaluate the sufficiency and appropriateness of audit evidence obtained

Question 2

ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

The auditor performs a series of steps in assessing the risks of material misstatement and responding appropriately to that risk (IMACPA)

Answer 2

1. Internal control, entity, and environment-obtain an understanding
2. Material Misstatement-assess the risk
3. Assessed level of risk response
4. Control Testing
5. Perform Substantive Procedures
6. Audit Evidence-evaluate appropriateness and sufficiency

Question 3

ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

Obtain an understanding of the entity and its environment

Risk Assessment Procedures and Objectives

Answer 3

1. Inquiries
   
   • generally mgmnt and others within entity
   • may also be other parties, including board of directors and audit committee, internal auditors, and parties outside the entity
2. Analytical Procedures(required during planning stage and final review stage)
   
   • during planning-analytical procedures consist of a review of data aggregated at a high level, such as comparing f/s to budgeted or anticipated results
   • generally, financial data is used, though relevant nonfinancial data(# of employees, square footage of selling space, or volume of goods produced) and their relationships with related financial data maybe considered.
3. Observation and Inspection-the auditor may observe activities and operations, inspect company documents, read management reports, board minutes, and internal audit reports, visit the entity’s premises, and trace transactions through the information system
4. Risk Assessment Discussion (with audit team)
   
   • can be held concurrently with the fraud risk discussion
   • should include areas of significant audit risk
   • allows more experienced team members to share their insights with less experienced staff
   • emphasis need for professional skepticism
   • should continue throughout the audit
5. Other procedures-reviewing external info, results of fraud risk assessment, info obtained during client acceptance, info obtained on other engagements performed for the entity, prior period evidence

Objectives

1. enhance the auditor’s understanding of the entity and of transactions and events that have occurred since the last audit date
2. identify unusual transactions and events, and amounts, ratios, or trends that might be significant to the financial statements and may represent specific risk relevant to the audit.

Question 4

ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

Obtain an understanding of the entity and its environment

PCAOB Standards related to analytical procedures as risk assessment procedures

Answer 4

The auditor should perform analytical procedures related to revenue in order to identify unusual or unexpected relationships that might indicate material misstatement, including material misstatement due to fraud.

Question 5

ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

Obtain an understanding of the entity and its environment

Risk Assessment Procedures and Audit Evidence ((always neccessary in FS audit)

Substantive and tests of controls

Answer 5

the auditor may also choose to perform substantive procedures or tests of controls concurrently with risk assessment procedures, if it is efficient to do so.

Question 7

Assessing the Risks of Material Misstatement

Answer 7

1. Scope of the Assessment
2. Assessing Specific Risks
3. Significant Risks
4. Other Matters Noted
5. Required Documentation