Immersing in audit

  Many entities outsource aspects of their business to organizations that provide services ranging from performing a specific task under the direction of an entity to replacing an entity’s entire business units or functions, such as the tax compliance function.

  The auditor identifies the risks of material misstatement and determines whether they exist at two levels: (a) The financial statement level ; or (b) The assertion level for classes of transactions, account balances and disclosures The auditor responds to identified and assessed risks at each level by performing suitable procedures to obtain audit evidence. Auditor`s responses to assessed risk of material misstatement at the financial statement levels. Auditors design overall responses to address the assessed risks of material misstatement at the financial statement level. The assessment of the risks of material misstatement at the financial statement level, and thereby the auditor’s overall responses, is affected by the auditor’s understanding of the control environment. An effective control environment may allow the auditor to have more confidence in internal control l and the reliability of audit evidence generated internally within the company. Overall responses to

  Auditors use test of controls and substantive procedures to respond to the assessed risks of material misstatement at the assertion level.

 ISA 315 deals with the auditor’s responsibility to design and implement responses to the risks of material misstatement identified and assessed by the auditor in accordance with ISA 315  in an audit of financial statements. The standard defines such requirements as Overall Responses, Audit Procedures Responsive to the Assessed Risks of Material Misstatement at the Assertion Level, Adequacy of Presentation of the Financial Statements, Evaluating the Sufficiency and Appropriateness of Audit Evidence, Documenting of auditor`s response to assessed risk.

  Materiality Misstatements, including omissions, are considered to be material if they, individually or in aggregate, could reasonably influence the economic decisions of users taken on the basis of the financial statements. Financial statements are reliable if there are no material misstatements in them. Accordingly, when conducting an audit, it becomes necessary to determine the level of materiality .

  Identification and assessment the risk of material misstatement is important part of audit process. This is necessary to provide a basis for designing and implementing responses (audit procedures) to the assessed risks of material misstatement. The work performed by auditors to identify and assess the risk of material misstatement is usually documented in audit documents.

  Risks of material misstatement  are identified and assessed by the auditor in order to determine the nature, timing and extent of further audit procedures necessary to obtain sufficient appropriate audit evidence. This evidence enables the auditor to express an opinion on the financial statements at an acceptably low level of audit risk. Risk of material misstatement —The risk that the financial statements are materially misstated prior to audit. Risk assessment procedures  – The audit procedures designed and performed to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. The risk assessment procedures  include the following: (a) Inquiries of management and of other appropriate individuals within the company, including individuals within the internal audit function (if the function exists). (b) Analytical procedures. (c) Observation and inspection. ISA 315

  Business risk  is a risk resulting from significant conditions, events, circumstances, actions, or inactions that could damage a company’s ability to achieve its objectives and execute its strategies. Risk of material misstatement  is a risk that the financial statements are materially misstated prior to audit.

  An understanding of the company and its environment, and the applicable financial reporting framework  helps the auditor to understand the events and conditions that are relevant to the company. This is necessary to conduct an effective independent audit in accordance with a risk-based approach. This activity is aimed at collecting and analyzing information that allows identifying the client's  business risks  and assessing their impact on the financial statements.

  An auditor identifies the risks of material misstatement and determine whether they exist at: (a) The financial statement level; or (b) The assertion level for classes of transactions, account balances and disclosures (a) Risks of material misstatement at the financial statement level  refer to risks that relate pervasively to the financial statements as a whole, and potentially affect many assertions. Events or conditions that may indicate risks of material misstatement at the financial statement level may following matters: ● Lack of personnel with appropriate accounting and financial reporting skills. ● Control deficiencies – particularly in the control environment, risk assessment process and process for monitoring, and especially those not addressed by management. ● Past misstatements, history of errors or a significant amount of adjustments at period. Risks of material misstatement at the financial statement level  due to fraud is also relevant to the auditor’s consideration. I

  The ISA 315 deals with the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements using the   understanding the company and its environment, including the company’s internal control.

  Control activities is one of the components of the company’s system of internal control. Components of the Company’s System of Internal Control Control activities include information processing controls and general IT controls, both of which may be manual or automated in nature. It is necessary to identify the IT applications and supporting IT infrastructure to understand of how information relating to significant classes of transactions, account balances and disclosures flows into, through and out the company’s information system. The greater the extent of automated controls,   that management uses and relies on in relation to its financial reporting, the more important it may become for the company to implement general IT controls that address the functioning of the automated aspects of information processing controls. The auditor obtains an understanding of the information processing controls and general IT control, through performing risk assessment procedures, by: 1 . Ide

Inherent risk factors are characteristics of events or conditions that affect susceptibility of an assertion about a class of transactions, account balance or disclosure, to misstatement, whether due to fraud or error, and before consideration of controls. Such factors may be qualitative or quantitative, and include complexity, subjectivity, change, uncertainty, and susceptibility to misstatement due to management bias or other fraud risk factor s.

  Assertions are representations by management that are embodied in the financial statements and used by the auditor to consider the different types of potential misstatements that may occur. Assertions may fall into the following categories: Assertions about classes of transactions and events, and related disclosures, for the period under audit : ·         Occurrence —transactions and events that have been recorded or disclosed have occurred, and such transactions and events are related to the company. ·         Completeness —all transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.   ·         Accuracy —amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described. ·         Cutoff— transactions and events have been recorded in the correct a

  Internal control is the process designed, implemented and maintained by the board of directors, management and other personnel to provide reasonable assurance about the achievement of a company’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The auditor’s understanding of the company’s system of internal control is obtained through risk assessment procedures performed to understand and evaluate each of the components of the system of internal control. The system of internal control consists of the following components:      Control environment .      The company’s risk assessments possess.      The company’s process to monitor the system of internal control.      Information System and Communication.      Control Activities .   Control environment covers the following matters: (a)     How management’s responsibilities are carried out, such as creating and main