AUDIT PROCEDURES RESPONSlVE TO RISK OF MATERIAL MISSTATEMENT AT THE ASSERTION LEVEL Auditing Help

The phrase “audit procedures responsive to risk of material misstatement” means that based upon assessed risk of inherent and control risks the auditor should

(a) plan for overall response and

(b) plan and perform audit procedures in relation to specific assertions.

OVERALL RESPONSES AT FINANCIAL STATEMENT LEVEL

1. The auditor should determine overall responses to address risks of material misstatement at the financial statement level. “The phrase over all responses” mean  that the auditor should:

– maintain professional skepticism in gathering and evaluating audit evidence
– delegate the work to more experienced and skilled staff
– consult with experts
– modify nature, timing and extent of audit procedures as overall response.

2. Understanding of control environment assists the auditor in assessment of risks of material misstatements at the financial statement level. For example, if control environment is weak, the auditor may use a substantive approach; else combined approach (tests of controls as well as substantive procedures) may be used.

The overall response is affected by control environment and inherent risk at financial statement level. Such response includes consideration when to use restrictive substantive procedure or expanded substantive procedures.

Specific response to material misstatement involves designing and performing appropriate tests of controls and substantive procedures.

Matters to be considered in designing further audit procedures include
impact and likelihood of risk of material misstatement

The auditor may rely:
– Only on tests of controls
– Only on substantive procedures
– Combination of both.

Nature, timing and extent of further audit procedures for obtaining evidence as regards assertions.

Nature

Nature of audit procedures refers to two aspects:

– Whether to perform test of control or substantive procedures
– Selection of type of procedures i.e., inspection, observation inquiry, confirmation, recalculation, performance or analytical procedures.

Examples

Tests of controls are more appropriate than substantive procedure to verify completeness assertion of inventories.

Substantive procedures are more appropriate than test of controls to verify existence and valuation of inventories

In case controls over sales and receivable are weak, the auditor will place more reliance on tests of details rather than on analytical procedures.

Timings

The timings of audit procedures means to when perform audit test and whether certain tests can be performed at an interim audit.

Extent

Extent means the number of items to be tested. The auditor’s judgment as to the number of items to be tested is influence by:

  • materiality
  • assessed risk
  • planned audit risk.

FINANCIAL STATEMENT ASSERTIONS

The objective of audit is expression of opinion whether the financial statements give true and fair view. To attain this objective, the auditor identifies specific objectives for each account reported in the financial statements. These specific objectives are derived from the assertions made by management that are contained in the financial statements.

The financial statements’ assertions are categorized in three classifications.

1. Assertions about class of transactions and events for the period under audit.

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2. Assertion about account balances at year end

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3. Assertions about presentation and disclosures

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Posted on November 3, 2015 in The Auditor Response to Assessed Risks

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