Assurance - Planning - Risk Assessment

Question 1

What is the first step of using the RAMP model and what is the risk of material misstatement

Answer 1

R - Risk Assessment
CAS 200
Risk of material misstatement (RMM) - the identification, analysis, and management of risks relevant to the preparation of financial statements to ensure that F/S are presented fairly and in compliance with the accounting framework

Question 2

Explain what is the audit risk model and provide the formula

Answer 2

Audit risk - Risk that the auditor gives the wrong opinion on the F/S. There is a risk the auditor will miss a material misstatement in F/S and provide an unmodified audit opinion

Audit risk (AR) = Risk of material misstatement* Detection risk (DR)
RMM = Inherent risk (IR) * Control risk (CR)

Question 3

Explain what is inherent risk, control risk and detection risk

Answer 3

Inherent risk (IR) - Likelihood that F/S are misstated before considering internal control
Ex. can be from internal/ external factors, made up of business risk

Control risk (CR) - Likelihood that misstatement resulting from IR will not be prevented or detected and corrected by internal control

Detection risk (DR) - Likelihood that the auditor will not detect existing misstatements in the F/S. Auditors are to design procedures that bring DR to an acceptable low level

Question 4

Provide a diagram for the audit risk to be brought at a low level

Answer 4

AR = IR * CR * DR
Low = High * High * Low
Low = Low * Low *High

• Have an inverse relationship between the assessed level of RMM and the acceptable level of DR

Question 5

How does CAS 315 help assess the RMM

Answer 5

With using CAS 315 - Identifying and Assessing the RMM model
- It required the auditor to gain an understanding of the entity and its environment
Ex. Entity organization structure, ownership, and governance of their business model
- Industry, regulatory and other external factor
- Measure used, internally and externally to assess the entity’s performance

• Applicable financial reporting framework, accounting policies, and any changes
• IR factor affects the susceptibility of an assertion to misstatement and the degree to which it does so.

Question 6

Explain what the overall financial statement level (OFSL) and the assertion level

Answer 6

Overall financial statement level (OFSL) - Relates to the F/S as a whole. Risk is more likely when there is a possibility of fraud

Assertion level - Relates to a specific class of transaction balance or disclosure. Use for IR & CR

Auditors gather evidence using different techniques such as:
1. Inquiring with management, internal audit department, BOD, and legal counsel
2. Performing analytical procedures over available financial information
3. Observing and inspecting processes, control, and significant document

Question 7

What are the factors to consider when assessing risk at OFSL

Answer 7

• Need to assess persuasive risk
  IR for OFSL - effective and efficient operation, reliable financial reporting, compliance
  Ex. Entity poor financial health, market competition, the entity hasn’t been audited, purchase or sell of the company

CR of OFSL - Risk that material misstatement, individually or in aggregate with other misstatement
- Control policies/ procedures, ensure appropriate action
Components: Control environment, the process to monitor the system for internal control, information system, and communication, control activities
Factors: Lack of segregation of duties, internal control function, general computer control, such as password, firewall, encryption, protection, management has a poor attitude towards control or place

Question 8

Explain how to determine the RMM at the assertion level

Answer 8

• Auditors assess the RMM from the classes of the transaction, account balance, and disclosure presentation
• Categorized into IR & CR factor

IR at the assertion level
- Magnitude of misstatement takes into account the quant and qual aspects possible
- Financial reporting framework, including, complexity, subjectivity, change, uncertainty bias
Ex. Nature of business, characteristics of account balance, or class of transaction

CR factors at the assertion level
- Control that addresses a risk that is determined to be a significant factor, control over journal entries, control for auditor plans operating effectiveness
Ex. Lack of authorization controls, lack of physical security, control over inventory, Lack of segregation of duties