Audit 3 Assessing risk of material Misstatement

Types of analytical procedures in the planning stage (Required)

-Review data aggregated at a high level (comparing F/S to budget -Financial data and its relationship to nonfinancial data may be considered -Objective is to identify unusual translations (Revenue required) and events as well as learn about the entity

Analytical Procedures in risk assessment

Done in the planning to understand the entity and identify area of risk (mandatory), used as substantive tests to obtain audit evidence and as an overall review in the final stage of the audit (mandatory)

Understanding the entity in a group engagement

Enhance its understanding of the group, its components and their environments including group-wide controls Obtain an understanding of the consolidation process Confirm and revise significant componets

Understanding of the entity and its environment

Identify risk of material misstatement and make informed judgments about materiality, entity's selection of acct policies, areas for special consideration, development of expectations for analytical procedures, design and performance of further audit procedures, and evaluation of audit evidence

Other procedures in risk assessment

In gaining an understanding of the entity and its IC the auditor should Review external information The results of the fraud risk assessment Prior period evidence

risk assessment procedures

Inquiries Analytical Procedures Observation and inspection Risk assessment discussion Other procedures

Inquiries of risk assessment

Made of management and others within the entity and other parties like the BoD, audit committee, internal auditors, and parties outside the entity.

Risk assessment discussion

Members of the audit team should discuss the F/S susceptibility to material misstatement. Can be done in conjunction with fraud discussion, should include areas of significant audit risk, should emphasize the need for professional skepticism, should continue throughout the audit.

Steps to assessing the risk of material misstatement

Obtain an understanding of the entity Assess RMM Respond to assessed level of risk (further audit procedures) Test IC to evaluate effectiveness Perform substantive procedures Evaluate sufficient and appropriateness of audit evidence obtained

PCAOB Understanding of the co and IC

Read public information about entity relevant to the likelihood of material misstatement Observe or read transcripts of earnings calls Obtain an understanding of compensation arrangements with senior managers Obtain info from SEC filings

Factors that are indicative of a significant risk

Risk of fraud Significant recent economic, accounting or other developments Related parties Improper revenue recognition Non routine unusual or complex transactions Estimates noncompliance Principles subject to different interpretations

Financial Statement level risks

Risks of material misstatement that relate pervasively to the financial statements as a whole and potentially impact many relevant assertions.

Assertion level risks

Risks of material misstatement that relate to specific transactions, account balances, or disclosures at the relevant assertion level. The auditor should identify controls that have been properly designed and implemented such that they are able to prevent, detect and correct material misstatement.

Significant risks

Risks that require special audit attention. The auditor uses professional judgment to determine is a given risk of material misstatement is a significant risk. It is based on magnitude and likelihood of misstatement (Inherent risk is high)

Risk of material misstatement Other matters

Significant control related matters should be communicated to governance Internal control matters, integrity matters, or insufficient records etc may call for a qualified opinion

audit evidence and risk assessment procedures

The auditor can choose to perform substantive procedures or test of controls concurrently with risk assessment procedures but NOT required. ONLY ANALYTICAL PROCEDURES AND RISK ASSESSMENT PROCEDURES ARE REQUIRED

Observation and inspection (risk assessment)

The auditor may observe operations inspect company documents, read management reports, board minutes and internal audit reports

selection and application of accounting policies

The auditor should understand the entity's selection and application of accounting policies including reasons for change and evaluate whether the policies are appropriate for the business and consistent with the industry framework.

assessing the risk of material misstatement

The auditor used its understanding of the entity, its environment including IC to do this. It can be done by assessing IR and CR separately or all at once by just assessing RMM.

Required Documentation

The discussion among the auditing team Key elements of the understanding of the entity and its environment The assessment of the risks or material misstatement Identified risks and related controls evaluated by the auditor

Other components to understanding the entity and its IC

Understand objectives, strategies and business risks; Their financial performance; Internal control including selection and application of accounting policies