What is the importance of Auditor’s Risk Assessment process? Detail your answer.
What is the difference between substantive analytical procedures and test of details? Detail your answer.
Discuss how does internal control assessment affects audit risk model?
-> Auditor's risk assessment procedures are very important and form the very basis for the audit. Under risk assessment procedures, auditor performs a variance analysis of the current year figures with past year figures to identify any unusual trend. It usually involves setting up an expectation based on past year trends and industry standards for the current year figures and then comparing such estimated figures with the actual figures to find out the variance. It helps the auditor to identify FSLIs or areas where potential material misstatement might be present.
The most significant importance of risk assessment procedures for an auditor is that these procedures are necessary to prepare an efficient and effective audit program as they help in identifying significant risks. Significant risks are those risks which require significant audit consideration as they pose as a potential threat of material misstatement.
-> Substantive Analytical procedures vs Test of Details :
Even though they are both substantive tests, the way they are performed and the methodology used in performing them is quite different. Substantive analytical procedures does not involve vouching the numbers, rather it aims at finding unusual and unexpected trends. It involves developing a potential range of expectation for the current year figures and if the actual figure as per the financial statements provided by the client are within that range, it is concluded that no material misstatement exists. On the other hand test of details involve comprehensive testing and aims at finding evidence for the number appearing in the financial statement. It involves reconciling the financial statement figure with trial balance and GL, checking supporting documents for the transactions behind those balances such as checking/vouching sales or purchase invoices, expense invoices etc. Test of details provides direct evidence of the balance appearing in the financial statements whereas substantive analytical procedures use financial measures such as ratios, last year figures and budgets to evaluate that the financial statements are free from material misstatements.
-> Audit risk is defined as the risk of auditor providing an incorrect opinion on financial statements. Audit risk consists of three components - a) Inherent risk b) Control risk & c) Detection risk
Determination of inherent risk and control risk is inversely related to determination of detection risk.
First of all let's understand what all this risks mean in brief :
Inherent risk - It is the risk that the financial statements are misstated due to deficiency in client's procedures and systems. Auditor cannot do anything about this risk since it is inherent.
Control risk - It is the risk that internal controls fail to detect, prevent and correct material misstatements in financial statements.
Detection Risk - This is auditor's risk that the auditor fails to identify that a material misstatement exists in the financial statements.
Hence the level of inherent and control risk identified will be inversely related to the detection risk. If inherent and control risk are high, then the auditor has to keep a low detection risk in order to reduce the overall audit risk to an acceptably low level. Hence this is how internal control assessment affects the overall audit risk assessment/model.
What is the importance of Auditor’s Risk Assessment process? Detail your answer. What is the difference...
a- What is the importance of the Auditor’s Risk Assessment process? Detail your answer. b- Discuss how does internal control assessment affects the audit risk model?
a- What is the importance of the Auditor’s Risk Assessment process? one paragraph.(200 words max) b- Discuss how does internal control assessment affects the audit risk model? one paragraph (200 words max)
Question 13 When control risk is deemed high, the auditor should: (Select the correct answer.) a. Perform sufficient and appropriate substantive procedures that reduce detection risk to a low level. b. Perform sufficient and appropriate substantive procedures that reduce inherent risk to a low level. c. Perform fewer sufficient and appropriate substantive procedures in order to increase detection risk. d. Resign from the audit engagement. Question 14 An auditor determines that management integrity is high, the RMM is low, and...
Which of the following is true about analytical procedures? Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements. Performing analytical procedures results in the most reliable form of evidence. Analytical procedures are used for planning, but they should not be used to obtain evidence as to the reasonableness of specific account balances. Analytical procedures are tests of controls used to evaluate the quality...
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ADA as a risk assessment procedure versus a substantive test Timothy Steele, a recent college graduate and new audit staff member, is having lunch with Michael Watts, an audit senior. Both are working on the audit engagement of a retailer that has operations in North America and Europe. Timothy has another question for Michael: “In my reading I have seen a number of examples of audit data analytics. However, I am having a difficult time distinguishing between ADA as a...