Transcript Audit Strategy: Intro to Risk

ICAP Training Seminar
Training Seminar:
Students of Small and Medium Sized
Practices
February 17, 2007
BDO International
ICAP Training Seminar
Outline of the Day
• Introduction to Risk
– ISA 315 “Understanding the Entity and Its Environment and
Assessing the Risks of Material Misstatement”
• Responses to Risk
– ISA 330 “Responses to Risk”
• Practical aspects of Planning the Audit Work
– ISA 300/320
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In other words…
ISA 240/315
• What could go wrong?
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ISA 330
• What are we going to do
about it?
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Why?
Risk of Material
Misstatement
Fraud
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Error
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Our Responsibilities
• ‘An auditor is not bound to be a detective, or,
as was said, to approach his work with
suspicion or with a foregone conclusion that
there is something wrong. He is a watchdog
but not a bloodhound.’
Re: Kingston Cotton Mill CO (No 2) 1896
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Mandatory team
discussion to be
held (ISA 300)
Fraud should be
considered in context
of errors/testing results
Professional
Scepticism
The Standard & The Audit
May want to hold
final discussion at
completion?
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Definition of Risk
Audit Risk =
Inherent Risk x Control Risk x Detection Risk
Risk of Material Misstatement
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ISA 315 - Overview (Para 2, ISA 315)
“The auditor should obtain an understanding of
the entity and its environment, including its
internal control, sufficient to identify and assess
the risks of material misstatement of the
financial statements whether due to fraud or
error, and sufficient to design and perform
further audit procedures”
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Requirements of ISA 315
Risk assessment procedures and
Understanding the
sources of information about the entity
entity and its
and its environment, including IC
environment including IC
OVERALL
REQUIREMENTS
Assessing the risks
of material misstatement
Communicating with
those charged with
governance
Documentation
and management
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Risk Assessment
• “…continuous, dynamic process of gathering, updating
and analysing information throughout the audit” (Para
6, ISA 315)
• Planning Meeting
• Risk assessment procedures:
– Enquiries of management and others within the entity
– Analytical procedures
– Observation and inspection
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ISA 330 - requirements
• Overall responses to risks of material
misstatement at the financial statement level
• Audit procedures responsive to risks of
material misstatement at the assertion level
• Evaluating the sufficiency and appropriateness
of audit evidence obtained
• Documentation
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Assertions – how much do you know?
• P&L
–
–
–
–
–
Occurrence
Completeness
Accuracy
Cutoff
Classification
• BS
–
–
–
–
–
Existence
Completeness
Rights & Obligations
Valuation
Presentation & Disclosure
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Assessing the risk of material misstatement
Identify risk
Risk of material
misstatement
Relate risk to what
can go wrong at
the assertion level
at FS and
Consider
assertion level
magnitude of risks
of risks
General Risk
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Likelihood
Specific Risk
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General Risks and General Controls
General Risks are
those risks that affect
multiple financial
statement areas or
tend to be pervasive
to the financial
statements.
General Controls
are those controls
that are pervasive
to the organisation
Information Gathering
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Nature of Procedures
ToCs
SAPs
OSPs
ASSURANCE
Risk
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ISA 300
• Preliminary engagement activities
• Planning activities
• Initial audit engagements
“The auditor should plan the audit so that the
engagement will be performed in an effective
manner.”
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ISA 320 – Audit Materiality
Planning Materiality
• Materiality refers to the size or nature of a misstatement that, in
the light of the surrounding circumstances, makes it probable that
the judgement of a reasonable user of the financial statements
would have been changed or influenced as a result of the
misstatement.
• Only material misstatements and uncertainties will affect our audit
opinion. Our audit procedures should not therefore be
concerned with detecting misstatements that could not be
material; they need to be focused on obtaining assurance that
material misstatements do not exist
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