Understanding Audit Risk Assessment Objectives of

Transcript:Understanding Audit Risk Assessment Objectives of:
Understanding Audit Risk Assessment Objectives of This Course: Outline the PPC audit risk assessment process Understand how to use PPC practice aids to perform and document risk assessment What is Risk Assessment? Risk Assessment Obtain an understanding of the client, including internal control Identify and assess risks of material misstatement of the financial statements, whether due to error or fraud Evaluate both overall risks and risks that affect only specific assertions Linkage Audit Procedures Concentrate audit effort in high risk areas Inherent risk Control risk Perform less extensive procedures in low risk areas PPC Audit Approach Preliminary Engagement Activities Client Acceptance/Continuance Consider: Nature and purpose of engagement Preconditions for an audit Client’s reputation, integrity, and competence Communication with predecessor Compliance with ethical requirements, including independence Adequacy of accounting records Firm resources and competence Engagement economics Other risk concerns Document CX-1.1: “Engagement Acceptance and Continuance Form” CX-1.2: “Engagement Independence Compliance and Nonattest Services Documentation Form” CX-7.1: “Risk Assessment Summary Form” (if risks are identified) Establish an Understanding with the Client Establish an understanding about: Objectives of the engagement Auditor’s services to be performed, including nonattest services Management’s responsibilities Auditor’s responsibilities Limitations of the engagement Communicate the understanding in a written engagement letter CL-1.1: “Audit Engagement Letter” Planning and Risk Assessment Procedures Engagement Team Discussion Susceptibility of the financial statements to material misstatement, including material misstatement due to fraud or error that could result from the related party relationships Application of GAAP to the entity’s facts and circumstances in light of its accounting policies Fraud-related matters Include: Critical issues and areas of significant audit risk Areas susceptible to management override of controls Unusual accounting practices Important control systems Significant IT applications and how IT may affect the audit Materiality considerations Need to exercise professional skepticism Business risks Engagement Team Discussion (cont.) Attendance: Engagement partner Key members of engagement team Document: How and when the discussion occurred, who participated, and decisions about planned responses CX-3.2: “Engagement Team Discussion” CX-7.1: “Risk Assessment Summary Form” (if risks are identified) Materiality Materiality for the financial statements as a whole Materiality for particular items of lesser amounts Performance materiality Component materiality (group audits only) Materiality (cont.) Apply professional judgment Consider decisions that users make Use appropriate benchmarks, such as % of assets or revenue Re-evaluate materiality as the audit progresses. If lower, reconsider: Level of performance materiality Adequacy of procedures Materiality (cont…) Document: Materiality at the financial