Guide to Using International Standards on Auditing in - IFAC

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94 8. Risk Assessment Procedures Chapter Content The nature and use of risk assessment procedures by an audi<strong>to</strong>r <strong>to</strong> identify and assess the risks of material misstatement. Relevant ISAs 240, 315 The three risk assessment procedures are illustrated in the exhibit below. Exhibit 8.0-1 Paragraph # Relevant Extracts from ISAs 315.5 The audi<strong>to</strong>r shall perform risk assessment procedures <strong>to</strong> provide a basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels. Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit evidence on which <strong>to</strong> base the audit opinion. (Ref: Para. A1-A5) 315.6 The risk assessment procedures shall include the following: (a) Inquiries of management and of others within the entity who in the audi<strong>to</strong>r’s judgment may have information that is likely <strong>to</strong> assist in identifying risks of material misstatement due <strong>to</strong> fraud or error. (Ref: Para. A6) (b) Analytical procedures. (Ref: Para. A7-A10) (c) Observation and inspection. (Ref: Para. A11)
95 <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 Paragraph # Relevant Extracts from ISAs 315.11 The audi<strong>to</strong>r shall obtain an understanding of the following: (a) Relevant industry, regula<strong>to</strong>ry, and other external fac<strong>to</strong>rs including the applicable financial reporting framework. (Ref: Para. A17-A22) (b) The nature of the entity, including: (i) its operations; (ii) its ownership and governance structures; (iii) the types of investments that the entity is making and plans <strong>to</strong> make, including investments in special-purpose entities; and (iv) the way that the entity is structured and how it is financed <strong>to</strong> enable the audi<strong>to</strong>r <strong>to</strong> understand the classes of transactions, account balances, and disclosures <strong>to</strong> be expected in the financial statements. (Ref: Para. A23-A27) (c) The entity’s selection and application of accounting policies, including the reasons for changes there<strong>to</strong>. The audi<strong>to</strong>r shall evaluate whether the entity’s accounting policies are appropriate for its business and consistent with the applicable financial reporting framework and accounting policies used in the relevant industry. (Ref: Para. A28) (d) The entity’s objectives and strategies, and those related business risks that may result in risks of material misstatement. (Ref: Para. A29-A35) (e) The measurement and review of the entity’s financial performance. (Ref: Para. A36-A41) 315.12 The audi<strong>to</strong>r shall obtain an understanding of internal control relevant <strong>to</strong> the audit. Although most controls relevant <strong>to</strong> the audit are likely <strong>to</strong> relate <strong>to</strong> financial reporting, not all controls that relate <strong>to</strong> financial reporting are relevant <strong>to</strong> the audit. It is a matter of the audi<strong>to</strong>r’s professional judgment whether a control, individually or in combination with others, is relevant <strong>to</strong> the audit. (Ref: Para. A42-A65) 8.1 Overview The purpose of risk assessment procedures is <strong>to</strong> identify and assess risks of material misstatement. This is achieved through understanding the entity and its environment, including internal control. Information may be obtained from external sources, such as the Internet and trade publications, and from internal sources such as discussions with key personnel. This understanding of the entity becomes a continuous, dynamic process of gathering, updating and analyzing information throughout the audit. 8.2 Audit Evidence Risk assessment procedures provide audit evidence <strong>to</strong> support the assessment of risks at the financial statement and assertion levels. However, this evidence does not stand alone. Evidence obtained from risk assessment procedures is supplemented by further audit procedures (that respond <strong>to</strong> the risks identified) such as tests of controls and/or substantive procedures. Required Procedures The audi<strong>to</strong>r uses professional judgment <strong>to</strong> determine the risk assessment procedures <strong>to</strong> be performed, and the scope or depth of understanding of the entity that is required. In the first year that the audi<strong>to</strong>r conducts the audit for an entity, the work required <strong>to</strong> obtain and document this information will often require a significant amount of time. However, if the information obtained is well documented in the first year, the time required <strong>to</strong> update the information in subsequent years should be considerably less than that required in the first year.
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Guide to Using International Standards on Auditing in - IFAC

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