Understanding the Entity and Its Environment and Assessing the RoMM

Question 1

Define Risk Assessment Procedures

Answer 1

The audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels.

Question 2

Define Relevant Assertions

Answer 2

A financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.

Question 3

List the 3 risk assessment procedures and the 3 related activities

Answer 3

1. Inquiries of management and others
2. Analytical Procedures
3. observation and inspection
4. client acceptance and continuance process - is information obtained from with process relevant to identifying risk of material misstatement
5. Fraud risk assessment - consider results from this assessment
6. engagement team discussions

Question 4

List the 5 components of Internal Controls

Answer 4

1. Control environment
2. Entities Risk assessment Process
3. Information and Communication Systems.
4. Control Activities
5. Monitoring

Question 5

List the two levels that an auditor should assess the risk of material misstatment

Answer 5

Financial statement

Assertion

Question 6

Process for identifying and Assessing RoMM

Answer 6

1. identify risks throughout the process of obtaining an understanding of the entity and its environment, including internal control;
2. Assess the identified risks and evaluate whether they may be pervasive to the financial statements;
3. related the identified risks to what can go wrong at the relevant assertion level;
4. Consider the likelihood of misstatement (including the possibility of multiple misstatements)

Question 7

Steps in evaluating if a risk is significant

Answer 7

the auditor should consider

(1) whether the risk is a risk of fraud;
(2) whether the risk requires special attention because it relates to recent significant economic, accounting, or other developments;
(3) the complexity of transactions;
(4) whether the risk involves significant transactions with related parties;
(5) the degree of subjectivity in the measurement of financial information related to the risk; and
(6) whether the risk involves significant transactions that are unusual