Describe any risks of material misstatement at the financial statement level
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requires the auditor to determine overall responses to address the risks of material misstatement at the financial statement level. Such responses may include: Show
•emphasising to the audit team the need to maintain professional scepticism in gathering and evaluating audit evidence; •assigning more experienced staff or those with specialist skills or using experts; •providing more supervision, or incorporating additional elements of unpredictability in the selection of further audit procedures to be performed; and •making general changes to the nature, timing, or extent of audit procedures as an overall response. Need help? Get subscribed!To subscribe to this content, simply call 0800 231 5199 We can create a package that’s catered to your individual needs. Or book a demo to see this product in action. Call an Expert: 0800 231 5199 To be in a position to obtain reasonable assurance that the financial statements are free from material misstatement, the auditor needs to ensure audit risk is reduced to an acceptably low level. This therefore enables the auditor to draw conclusions on which to base the audit opinion. Audit risk can be defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are indeed materially misstated. The first step within an audit of financial statements involves the planning stage. Once the auditor has planned the audit and carried out the necessary steps to understand the entity and its environment and the entity’s system of internal control, the auditor will need to assess the risk of material misstatement and identify any significant risks pertaining to the entity. The identification of risks will include the assessment of the severity of such risk, with significant risks being the most severe risks identified by the auditor. A significant risk can be defined as an identified risk of material misstatement for which the assessment of inherent risk is higher, due to the degree to which the inherent risk factors affect both the likelihood of the misstatement occurring, as well as the magnitude of the potential misstatement, should that misstatement occur. Therefore, should a risk factor be in place that is likely to result in a misstatement within the financial statements of a greater magnitude, then that risk factor should be considered to be significant. Examples of risk factors could include the following:
Usual, routine, non-complex transactions would be less likely to give rise to significant risks. Alternatively, unusual, complex and judgemental transactions are more likely to bring about significant risk. The compilation of analytical procedures will assist the auditor to identify and assess risks of material misstatement. Such procedures will involve the analysis of relationships within entity balances to identify inconsistencies and unexpected relationships. Such procedures should be carried out at both risk assessment stage, as well as at the final stages of the audit. Analytical procedures at the risk assessment stage would assist the auditor to identify any aspects within the entity that the auditor may not have known about. They will further assist the auditor to assess the risks of material misstatement to be able to determine the nature, timing and extent of further audit procedures. The process for determining the level of audit risk within an entity’s transactions requires the auditor to exercise professional judgment. Once the auditor has identified and assessed the risks of material misstatement within an audit, the auditor must then respond to such audit risks accordingly. This will involve the process of designing and implementing procedures and responses to obtain sufficient and appropriate audit evidence about such risks. It is imperative that audit testing is directed to identified risky areas, to ensure that the audit is carried out in the most efficient and effective manner possible. The following risks are usually deemed to be significant risks in an audit of financial statements, and would therefore require increased focus from the auditor in terms of testing:
In a case where the auditor does not deem revenue recognition to be a significant risk, then such risk should be rebutted and documented accordingly. Documentation, in an audit of financial statements, enables reviewers and others outside of the engagement team, to assess and review relevant audit evidence obtained and the audit conclusions reached. In light of the above, it is imperative that the risk assessment process undertaken by the auditor is documented in sufficient detail and in line with the requirements of ISA 230.
Should you require further information, please get in touch with John Debattista on [email protected] or Janis Hyzler on [email protected]. Please note that this article is being published for information purposes only. As such, it does not constitute or should not be interpreted or construed as legal advice or guidance. Zampa Debattista does not accept responsibility or liability for any damages arising as a result of using this information as legal advice or guidance. John DebattistaPartnerJanis HyzlerAudit Leader
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