What is the auditor`s responses to assessed risks?

 


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 address the assessed risks of material misstatement at the financial statement level may include:

● Emphasizing to the engagement team the need to maintain professional skepticism.

 ● Assigning more experienced staff or those with special skills or using experts.

● Providing more supervision.

● Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed.

● Making general changes to the nature, timing or extent of audit procedures, for example: performing substantive procedures at the period end instead of at an interim date.

Audit Procedures Responsive to the Assessed Risks of Material Misstatement at the Assertion Level

The auditor’s assessment of the identified risks at the assertion level provides a basis for designing and performing further audit procedures. The auditor may perform:

(a)    Only tests of controls to achieve an effective response to the assessed risk of material misstatement for a particular assertion.

(b)   Only substantive procedures for particular assertions and, therefore, excludes the effect of controls from the relevant risk assessment. This may be because the auditor’s risk assessment procedures have not identified any effective controls relevant to the assertion, or because testing controls would be inefficient.

(c)    A combined approach using both tests of controls and substantive procedures is an effective approach.

However usually auditors design and perform substantive procedures for each material class of transactions, account balance, and disclosure.

 Also, auditors perform audit procedures to evaluate whether the overall presentation of the financial statements is in accordance with the applicable financial reporting framework by examining:

● Classification and description of financial information and the underlying transactions, events and conditions; and

● Presentation, structure and content of the financial statements.

 Documentation of the auditor`s responses to assessed risk should comprise:

(a) The overall responses to address the assessed risks of material misstatement at the financial statement level, and the nature, timing and extent of the further audit procedures performed.

(b) The linkage of those procedures with the assessed risks at the assertion level; and

 (c) The results of the audit procedures.

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