Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
6.4 <strong>Using</strong> Assertions in Auditing
Paragraph #
Relevant Extracts from ISAs
315.25 The audi<strong>to</strong>r shall identify and assess the risks of material misstatement at:
(a) the financial statement level; and (Ref: Para. A105-A108)
(b) the assertion level for classes of transactions, account balances, and disclosures (Ref: Para.
A109-A113)
<strong>to</strong> provide a basis for designing and performing further audit procedures.
As previously stated, the financial statements contain a number of embedded assertions. Assertions can be
used by the audi<strong>to</strong>r in assessing risks at the financial statement level and the assertion level.
Exhibit 6.4-1
Assessing Risks at:
Financial
Statement Level
Assertion Level
Commentary
The risks of material misstatement at the financial statement level tend <strong>to</strong> be
pervasive and therefore address all the assertions. For example, if the senior
accountant is not competent enough for the assigned tasks, it is quite possible
that errors could occur in the financial statements. However, the nature of such
errors will not often be confined <strong>to</strong> a single account balance, transaction stream, or
disclosure. In addition, the error will not likely be confined <strong>to</strong> a single assertion such
as the completeness of sales. It could just as easily relate <strong>to</strong> other assertions such as
accuracy, existence, and valuation.
Risks at the assertion level relate <strong>to</strong> individual account balances at a point in time (i.e.,
the period end), classes of transactions (for the fiscal period), and presentation and
disclosure in the financial statements.
The relevance of each assertion <strong>to</strong> an individual account balance (or class of
transactions, or presentation and disclosure) will vary based on the characteristics
of the balance and the potential risks of material misstatement. For example, when
considering the valuation assertion, the audi<strong>to</strong>r could assess the risk of error in
payables as low; however, for inven<strong>to</strong>ry where obsolescence is a fac<strong>to</strong>r, the audi<strong>to</strong>r
would assess the valuation risk as high. Another example is a situation in which the
risks of material misstatement due <strong>to</strong> completeness (missing items) in the inven<strong>to</strong>ry
balance are low, but high in relation <strong>to</strong> the sales balance.