– In risk assessment procedures evidence is obtained only by tracing a few transactions through the system. In testing operating effectiveness the auditor obtains sufficient evidence
– In risk assessment procedures the evidence obtained only through inquiry. In tests of controls only if quires is not sufficient
– Risk assessment procedures include inquiry, analytical procedures, inspection and observation. Tests of controls involve similar procedures but. include re-performance of controls by the auditor
– Risk assessment procedures are applied at beginning of audit. Tests of controls are performed throughout the audit
Assessing The Risk Of Material Misstatement
The auditor should assess risk- of materials statements at the fInancial statement level and at the assertion level for classes of transactions, account balances and disclosures.
Communicanting Weaknesses In Internal Controls
The auditor should communicate to audit committee and riianagement the weaknesses in the design and implementation of internal controls which have come to auditor’s attention.
A material weakness in the accounting andinternal control system is a condition which may result in material miSstatement in the financial statements.
Usually, material weakn.esses in the accounting and internal control system are communicated in writing. In some circumstances it may be appropriate for certain matters to be raised orally with directors and management. In such cases, the auditor should circulate the file note to those attending the meeting to provide a record of the auditor’s observations and any responses of the management.
Auditors may wish to refer to audit approach in the report to management, particularly. the work undertaken on the accounting and internal control system, to help management appreciate the nature, timing and extent of the audit procedures which have resulted in identification of the matters included in the report.
The auditor should stress that the study and evaluation of internal control system was made for the purpose of determining auditing procedures in order to form auditor’s opinion on the financial statements. The object of the study was not to provide assurance of the effectiveness of the internal control system. Accordingly the study would not necessarily reveal all weaknesses in the system.
A suggested form of opening paragraph of a letter is set out below. In planning and performing the audit of financial statements of XYZ Limited for the year ended December 31, 20×8, we studied the company’s control environment, control procedures and accounting system. The study was made for the purpose of- determining auditing procedures in order to form our opinion on the financial statements. The object of the study was not to provide assurance of the effectiveness of the internal control system. Accordingly our study would not necessarily reveal all weaknesses in the system. However, our study revealed certain matters involving the design and operation of the accounting and internal control system which we believe warrant your attention.