risk and understanding of entity

Question 1

ISA 315

Answer 1

-Identifying and Assessing the Risks of Material Misstatement

Question 2

assertions

Answer 2

auditor needs to obtain SAE to support assertions and disclosures in FS made by management
assertions are used by auditor when assessing risks of MM on an engagement

Question 3

objective of the audit and the assessment of risk

Answer 3

objective of auditor is to identify and assess ROMM, whether due to fraud or error, at the FS and assertion level, providing a basis for designing and implementing responses to the assessed risks of MM.

Question 4

audit risk

Answer 4

the risk that the auditor expresses an inappropriate opinion when the financial statements are materiality misstated.

Question 5

risk of material misstatement comprises of

Answer 5

Audit risk = inherent risk * control risk * detection risk

Question 6

latest requirement of how to evaluate risks

Answer 6

understand the audit risk of the client by obtaining an understanding of the entity and its environment, the applicable financial reporting standards (inherent risk) and the entity’s system of internal control. (control risk)

Question 7

define inherent risk

Answer 7

the susceptibility of an assertion about a class of transaction, balance or disclosure to a misstatement that could be material, either individually or in aggregation, before consideration of any related controls

Question 8

qualitative and quantitave inherent risk factors are

Answer 8

-complexity
-subjectivity
-change
-uncertainty
-management bias or fraud risk factors

IR is considered before any controls
IR and CR are both at assertion level

Question 9

understanding the financial reporting framework

Answer 9

-consider accounting policies, FR requirements, industry requirements
-some accounting standards can be misapplied either by error or deliberately, for eg. IFRS 15, IAS 37, and FOREX.
-new issues like crypto and environment are also subjective to management
evaluating financial reporting is part of overall assessment of inherent risk

Question 10

after risks have been identified auditor must

Answer 10

do a separate assessment of inherent and control risk
-inherent risk will be higher for some A,B,C,D (assertions, balances, classes, disclosures) than others and will require exercise of professional judgement

the degree to which inherent risk varies is called spectrum of inherent risk

Question 11

purpose of spectrum of inherent risk

Answer 11

helps determine if identified risk is significant or not

significance depends on likelihood and magnitude of potential misstatement

risks need to be prioritised so we can plan procedures accordingly

The higher on the spectrum of inherent risk a risk is assessed, the more persuasive the audit evidence needs to be.

Question 12

what is control risk

Answer 12

Control risk is the risk that the entity’s system of internal control will not prevent or detect and correct a misstatement on a timely basis. This can be due to weak or absent internal controls.

Question 13

components of the entity’s system of internal control

Answer 13

indirect controls: (affects risk of MM at financial statement level)
-control environment
-entity’s risk assessment process
-entity’s process to monitor the system of internal control

direct controls: auditor’s understanding affects risk of MM at assertion level
-information system and communication
-control activities

Question 14

If the auditor does not plan to test the operating effectiveness of the entity’s internal controls,

Answer 14

the risk of material misstatement is the same as the assessment of inherent risk. In other words, if the auditor is not planning on testing the controls, they assume there are no controls present in their risk assessment.

Question 14

planning stage

Answer 14

-consider whether the audit procedures will include planned reliance on the operating effectiveness of controls.
-Reliance on an entity’s system of internal control can reduce the level of substantive procedures the auditor performs.
-the auditor’s assessment of the risks is affected by their understanding of each of the components of the entity’s system of internal control.

Question 15

direct and indirect controls

Answer 15

Direct controls are designed to address the ROMM at the assertion level. eg. monthly bank acc reconciliation, ensuring all discrepancies are resolved, verifies the existence and accuracy of the bank balance at period end.

Indirect controls, like general IT controls, lack the precision to directly prevent, detect, or correct material misstatements at the assertion level. However, they can indirectly support direct controls, potentially enhancing the overall ability to detect or prevent misstatements.

Question 15

audit considerations relating to IT

Answer 15

he auditor needs to understand how the entity processes information, and how this data is used throughout the business. There should be an understanding of the accounting records, how the information is captured and controlled and how these flow into the accounts in the financial statements.

Question 16

how does IT benefit control ssytem of entity

Answer 16

Applying consistent business rules
Performing complex or repetitive bulk calculations
Facilitating analysis of information
Improving timeliness, availability and accuracy of information
Reducing the risk that controls can be avoided and enhancing the segregation of duties.

Question 17

why are automated controls better than manual controls?

Answer 17

-reliable
-not easilly overriden

Question 18

detection risk

Answer 18

risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will fail to detect a misstatement which exists that could be material.

detection risk is not part of risk of material misstatement

Question 19

what is the stand back requirement

Answer 19

-after obtaining understanding
-stand back and evalyate the evidence arising from risk assessment procedures
-apply professional skepticim in the evidence
-ISA 315 (Revised) ensures auditors confirm all material risks are identified, focusing on initially overlooked areas.