Procedure To Identify Risk Of Material Misstatements

Question 1

Procedure to identify

Answer 1

ISA 240 outlines specific procedures auditors must perform to identify risks of material misstatement due to fraud. These procedures help auditors gather sufficient and appropriate evidence to assess the risk of fraud and design appropriate responses.

1. Enquiries of Management:
   
   • Assessment of Fraud Risk: Ask management about their assessment of the risk of material fraud.
   • Processes for Identifying and Responding to Fraud: Inquire about the processes in place for identifying and responding to fraud risks, including any specific risks identified.
   • Communications within the Entity: Ask about any communications within the entity regarding fraud, including management’s views on business practices and ethical behavior.
   • Communication with Those Charged with Governance (TCWG): Inquire about management’s communication with TCWG regarding fraud risk processes.
   • Communication to Employees: Ask about management’s communication to employees regarding business practices and ethical behavior.
2. Inquiries of Management and Others:
   
   • Knowledge of Fraud: Inquire whether management and others within the entity have any knowledge of actual, suspected, or alleged frauds.
   • Views on Fraud Risks: Obtain views about the risks of fraud from management and others.
3. Inquiries with Those Charged with Governance (TCWG):
   
   • Oversight of Fraud Risk Processes: Understand how TCWG oversee management’s processes for identifying and responding to fraud risks and the internal controls established to mitigate these risks.
   • Knowledge of Fraud: Inquire whether TCWG have any knowledge of actual, suspected, or alleged fraud affecting the entity. These inquiries help corroborate management’s responses.
4. Inquiries of Internal Audit:
   
   • Internal Audit Insights: Inquire with internal audit about their knowledge of fraud risks and any findings related to fraud.
5. Analytical Procedures:
   
   • Unusual or Unexpected Relationships: Evaluate any unusual or unexpected relationships identified during analytical procedures that might indicate a risk of material fraud.
6. Evaluation of Other Risk Assessment Procedures:
   
   • Fraud Risk Factors: Evaluate information obtained from other risk assessment procedures to identify any fraud risk factors.

Scenario: An auditor is assessing the risk of material misstatement due to fraud in a manufacturing company.

Audit Procedures:
1. Enquiries of Management:
- The auditor asks the CFO about their assessment of fraud risk and the processes in place to identify and respond to these risks.
- The auditor inquires about any communications to employees regarding ethical behavior and business practices.

2. Inquiries of Management and Others:
   
   • The auditor asks department heads if they are aware of any actual, suspected, or alleged frauds.
3. Inquiries with TCWG:
   
   • The auditor meets with the audit committee to understand how they oversee management’s fraud risk processes and whether they are aware of any fraud.
4. Inquiries of Internal Audit:
   
   • The auditor discusses with the internal audit team to gather insights on any fraud risks they have identified.
5. Analytical Procedures:
   
   • The auditor performs analytical procedures and identifies an unusual increase in revenue at the end of the year, which could indicate premature revenue recognition.
6. Evaluation of Other Risk Assessment Procedures:
   
   • The auditor reviews information from other risk assessment procedures to identify any additional fraud risk factors.

By following these procedures, auditors can effectively identify and assess the risk of material misstatement due to fraud, ensuring a thorough and comprehensive audit process. If you have any further questions or need more examples, feel free to ask!