Risk assessment and other assurance engagements Flashcards
Business risk
Risk that could adversely affect an entity’s ability to achieve its objectives
Categories of business risk
Financial risks
Operational risks
Compliance risks
Audit risk
Risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Audit risk calculation
Audit risk = inherent risk x control risk x detection risk
Inherent risk
A factor that increases the susceptibility of an assertion to misstatement that could be material
Control risk
Risk that a misstatement will not be prevented on a timely basis by the entity’s internal control
Inherent risk factors
Complexity
Subjectivity
Change
Uncertainty
Susceptibility of bias and fraud
Spectrum of inherent risks
Each inherent risk factor is considered in terms of likelihood and materiality of a misstatement and plotted on a spectrum in terms of high and low
- Audit risk deemed to be significant when in plots high on the spectrum
Types of control
Indirect controls - affect risk of material misstatement at a financial statement level
Direct controls - affect risk of material misstatement at an assertion level
Detection risk
Risk that the procedures performed by the auditor to reduce audit risk will not detect a misstatement that exists
Components of detection risk
Sampling risk - material misstatement not discovered due to not sampling 100% of the transactions
Non-sampling risk - Other factors such as poor approach / rushed / lack objectivity
Scalability (ISA 315)
All requirements of an ISA should be implemented regardless of the size or complexity of the client
Visualisation tools in the Explore Module
Stacked bar charts
Bump chart
Heat map
Tree map
Types of metric prepared by the Metrics Module
Financial ratios - show relationship between two or more accounts
Financial information - show amounts taken from the accounts
Best used when question asks for analytical procedures
Risk assessment ISAs
ISA 315
ISA 320
ISA 330
ISA 315
Understanding the entity and its environment
Identify risk of material misstatements
ISA 320
Set materiality influenced by risks identified
ISA 330
Create response to the risks of material misstatement
Design and perform further audit procedures whose nature, timing and extent are based on / in response to the assessed risks of material misstatement at the assertion level
Sources of audit confidence
Internal controls ascertained by the auditor and documented
Controls relating to significant risks evaluated via a walkthrough
Tests of controls - audit judgement on effectiveness of controls
Amount of substantive testing impacted by confidence in internal controls
- tests on controls can reduce substantive testing
Types of substantive procedures
Tests of details - gain evidence on account balances and transactions that represent significant risks
Analytical procedures - appropriate for large volumes of predictable transactions which can be reviewed for consistent trends and relationships
Controls testing
Obtain evidence that the control is effective / was effective throughout the period under review
Test systematically
Verify that the control objectives were achieved by looking at the evidence
Consider what the control was designed to achieve and how to test that it worked as it was supposed to
Amount of substantive testing
Depends on the results of any controls testing done - combination of tests is part of reducing detection risk to an appropriate level
Controls operate at an effective level = reduced substantive testing
Controls not operating at an effective level = additional substantive testing
Controls not tested at all = enough substantive testing must be done to reduce the overall audit risk to an acceptable level
Data analytics
The use of technology through the audit to improve audit quality
Used in all stages of the audit
- Planning and risk assessment
- Substantive testing
- Testing controls
Examples of other assurance engagements
Auditor’s report
Report on Review of Historical / Prospective Financial Information
Engagement caveats
Review of prospective financial information - future may be different to predicted performance
Review of historical information
- the review is not an audit
Terms of assurance engagement
Who the user is and why they are using the information
Who will be able to access the information
How much assurance can be offered
What report is required
What period the assurance covers
Whether the firm has suitable skills and resources
Whether there are any ethical barriers to taking the engagement
Limited assurance engagement - limitation of scope
Material - qualify negative assurance explaining the possible adjustments to the financial statements
Pervasive - do not provide any assurance
Limited assurance engagement - misstated
“Matters have come to the attention of the assurance provider”
Material - qualify negative assurance explaining the adjustment to the financial statements
Pervasive - give an adverse statement that the financial statements do not give a true and fair view
