A3 Identifying & Responding to Risk

Question 1

Identifying Risks

Answer 1

Usually starts at the financial statement level risks, which relate pervasively to the FS as a whole & potentially impact many individual assertions.

Question 2

Assertion Level Risks

Answer 2

These are risks of material misstatement that relate to specific transactions, account balances, or disclosures. The auditor should assess IR & CR separately for identified risks of MM at the assertion level.

Question 3

Significant Risks

Answer 3

They exist when IR is higher on the spectrum. These are risks of material misstatement where the inherent risk assessment is close to the upper spectrum of IR.

Question 4

Nature of Audit Procedures

Answer 4

This includes its purpose & its type (inspection, observation, inquiry, confirmation, etc.). The higher the assessed risks of material misstatement the more pervasive the audit evidence must be.

Question 5

Extent of Audit Procedures

Answer 5

Refers to the quantity to be performed (number of observations or sample size used). The higher the assessed risk of MM the greater the extent of audit procedures should be.

Question 6

Timing of Audit Procedures

Answer 6

Refers to when audit test can be performed. The higher the assessed risk of MM the closer to period end substantive procedures should be performed.

Question 7

Dual Purpose Test

Answer 7

Test of controls that’s performed concurrently with test of details on the same transaction.

Question 8

Test of Controls

Answer 8

Performed when the auditor’s risk assessment is based on the assumption that controls are operating effectively (CR low). And also when $ubstantive procedures alone are insufficient (eg client uses alot of technology).

Question 9

$ubstantive Procedures

Answer 9

Used to detect MM at the relevant assertion level. These involve test of details and substantive analytical procedures (SAP’s).

Question 10

Test of Details

Answer 10

For more assurance. Involves looking at actual support (invoices, etc.). These tests gather audit evidence to support account balances.

Question 11

Substantive Analytical Procedures

Answer 11

These look at relationships, and compare what the auditors expectations is to the actual amount. Performing SAP’s at interim dates increases the risk that the auditor will not detect MM in the FS.