Performing audit procedures in response to assessed risks

Question 1

What is the auditor’s responsibility for assessing the risk of material misstatement?

Answer 1

The auditor should identify and assess the risks of material misstatement (1) at the financial statement level and (2) at the relevant assertion level related to classes of transactions, account balances, and disclosures.

Question 2

When must tests of control be performed?

Answer 2

When the auditor’s risk assessment includes an “expectation of the operating effectiveness of controls.” Note that this is frequently referred to as “relying” on internal control as a partial basis for the auditor’s conclusions, or “assessing control risk at less than the maximum level.”

Question 3

Define the term “significant risks.”

Answer 3

Risks that the auditor believes require special audit consideration

Question 4

List some examples of appropriate responses by the auditor to risks of material misstatement at the financial statement level.

Answer 4

1. )Assign more experienced staff to the engagement.
2. )Provide closer supervision.
3. )Use specialists.
4. )Use more unpredictable audit procedures.

Question 5

What specific matters should the auditor document regarding the auditor’s assessment of the risks of material misstatement?

Answer 5

1. )The discussion with key members of the audit team about the risks of material fraud and errors
2. )The major elements of the understanding of the five components of internal control
3. )The assessment of the risks of material misstatement (at the financial statement and relevant assertion levels) and the basis for that assessment
4. )The risks identified and the related controls the auditor evaluated