RISK ASSESSMENT PROCEDURES

Question 1

Risk Assessment Procedures

Answer 1

• Risk assessment procedures are those audit procedures that allow the auditor to obtain an understanding of the entity and its environment (including its internal control).
• These procedures may be used by the auditor as audit evidence to support assessment of the risks of material misstatement.
• While performing these procedures, the auditor may also obtain evidence about the relevant assertions related to classes of transactions, account balances, or disclosures and about the operating effectiveness of controls, even though these procedures were not specifically planned as substantive tests or tests of controls
• Substantive testing and tests of controls may be performed concurrently with risk assessment procedures if it is efficient to do so.

Question 2

Risk Assessment Procedures

Answer 2

The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control:

• Inquiries of management and others within the entity
• Analytical procedures
• Observation and inspection

Question 3

Assesment of internal control

Answer 3

The auditor examines the five interrelated components of internal control:

• Control environment
• Entity’s risk assessment
• Information and communication systems
• Control activities (the nature of specific relevant controls)
• Monitoring

Question 4

Implemention

Answer 4

The purpose of performing risk assessment procedures, including the audit evidence obtained in evaluating the design of controls and determining whether they have been implemented, is to obtain evidence to support the risk assessment.

Internal controls are only effective at mitigating risk if they are implemented. Internal controls are not
effective in mitigating risk if they are only authorized, tested, or monitored.

Question 5

Key Elements of the Understanding

Answer 5

The auditor should document key elements of the understanding obtained regarding each of the aspects of the entity and its environment, including:

• each of the components of internal control, to assess the risks of material misstatement of the financial statements
• the sources of information from which the understanding was obtained
• the risk assessment procedures.

Question 6

Analytical Procedures

Answer 6

Analytical procedures should be applied at two distinct phases in all audits.

• At the initial planning stages of the audit to assist the auditor in planning the nature, extent, and timing of other auditing procedures.
• As an overall review of the financial information in the final review stage of the audit.

Analytical procedures may also be used by the auditor as substantive procedures to obtain audit evidence about particular assertions

Question 7

Audit Planning

Answer 7

Audit planning involves developing an overall audit strategy for the expected conduct, organization, and staffing of the audit.

Analytical procedures are used during audit planning to assist the auditor in determining the nature, timing, and extent of other audit procedures.

Comparing recorded financial information with anticipated results from budgets and forecasts would be an analytical procedure used in audit planning.

Question 8

Analytical Procedures

Answer 8

Analytical procedures used in planning the audit should focus on the following:

• Enhancing the auditor’s understanding of the client’s business and the transactions and events that have occurred since the last audit data
• Identifying areas that may represent specific risks relevant to the audit

Question 9

Analytical Procedures

Answer 9

Analytical procedures are also used as a substantive test to test individual account balances that depend on accounting estimates and in the overall final review stage to evaluate the adequacy of evidence gathered concerning unusual balances.

The auditor may use analytical procedures to identify the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit implications

Question 10

Risk Assessment Procedures

Answer 10

In performing analytical procedures as risk assessment procedures, the auditor should develop expectations about plausible relationships that are reasonably expected to exist.

When comparison of these expectations with recorded amounts or ratios developed from recorded amounts yields unusual or unexpected relationships, the auditor should consider those results in identifying risks of material misstatement

Question 11

Estimation transactions

Answer 11

Estimation transactions are activities involving management’s judgments or assumptions, such as:

• determining the allowance for doubtful accounts
• establishing warranty reserves
• assessing assets for impairment

Question 12

Detection Risk

Answer 12

Detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion.

Detection risk may be viewed in terms of two components

(1) the risk that analytical procedures and other relevant substantive tests would fail to detect misstatements equal to tolerable misstatement
(2) the allowable risk of incorrect acceptance for the substantive tests of details

Question 13

Risk Assessment Terms

Answer 13

Inherent , Control and Detection Risk

May be assesseded in nonquantitative ( high medium low) or in quantitative terms ( percentages)

Question 14

Effectiveness of the audit

Answer 14

The risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement or deviation