ACCG340 Study Guide - Final Guide: Audit Risk, Audit Evidence, Clent
19 Jun 2018
School
Department
Course
Professor
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WK 3
Understanding The Entity & Risk Assessment
1. Levels of risk
a) Engagement risk
i. The risk the audit firm encounters as it is associated with the a particular
client:
1. may manifest as a lawsuit, loss of professional reputation, loss of fees,
or loss of other clients
2. sued by other stakeholder because of misstatements in the financial
statements, questionable management integrity, client going bankrupt
b) Business risk (i.e. entity and its environment)
i. Risk resulting from significant conditions, events, circumstances, actions
or inactions that could
adversely affect
the entity’s ability to achieve its
objectives and execute its strategies, or from setting inappropriate
objectives and strategies (ASA 315.4(b)), e.g. shipping, currency, regulation
barriers, competitions
ii. Note: broader than risk of material misstatement of financial report (i.e.
audit risk).
c) Audit risk
i. The risk that the auditor expresses an inappropriate audit opinion when the
financial report is materially misstated (i.e. the auditor does not
detect/report such misstatement) (ASA 200.13(c)).
ii. Note: achieved audit risk needs to be kept to an acceptably
low level
(ASA
500.A6), i.e. reasonable/high level of assurance provided to the users.
iii. 3 Components (can be referred to lec 2 p.3)
1. Detection risk: CAN be controlled by auditors
2. Control risk: CAN be controlled by management
3. Inherent risk: CANNOT be controlled by either
d) Risk assessment objective - ASA315.3
To identify and assess the
risks of material misstatement
, whether due to
fraud
or error
, at the financial statement and assertion levels, through
understanding
the entity
and its environment, including the entity’s internal control, thereby
providing a basis for designing and implementing responses to the assessed risks
of material misstatement.
ENGAGEMENT RISK (Audit Firm)
BUSINESS RISK (Client)
AUDIT RISK (IR / CR/ DR)
(Financial Report / Accounts / Assertion)
ENGAGEMENT RISK (Audit Firm)
BUSINESS RISK (Client)
AUDIT RISK (IR / CR/ DR)
(Financial Report / Accounts / Assertion)
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Understanding the entity - ASA315.A1
Establishes frame of reference within which auditor plans audit and exercises
professional judgement such as when:
e) assessing risk of
material misstatement
in FR
f) determining
materiality
g) considering appropriateness of accounting
policies and disclosures
h) identifying areas requiring
special audit consideration
i) developing
expectations
for use when performing analytical procedures
j) designing
audit procedures
in response to assessed risks of material misstatement
k) evaluating audit
evidence
Understanding the entity and its environment
l) External factors - ASA315.11(a) & a17-a22
i.
Industry
(e.g. market and competition, cyclical/seasonal activity,
technological developments)
ii.
Regulatory environment
(e.g. legislation and regulation; applicable
accounting framework and industry-specific principles; taxation; government
policies such as tariffs, trade restrictions; environmental requirements)
iii.
Economic environment
(e.g. level of economic activity, interest risks,
inflation, FX fluctuation) – affect A/R, sales, inventory
m) Internal factors:
i. Nature of entity - ASA315.11(b) & a23-a27
1. Business operations and governance structure
a)
business operations
(complex or not) such as nature of revenue sources,
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products/services/markets, e-commerce involvement (privacy of
customers), geographic dispersion, key customers/suppliers,
employment issues, R&D, related parties
b) The auditor needs to gain knowledge of issues such as products and
markets, conduct of operations, transactions with related parties etc.
c) Need to match accounting policies with the type of business operations
d) Need to consider ownership and governance structure e.g. responsibility
and oversight over financial reporting
2.
ownership and governance structures
3.
Investments and financing
a)
investments
such as acquisitions/mergers/disposal of business
activities, capital investment OR investments in technology and
non-consolidated activities such as joint ventures, are of significance
from an audit perspective
b)
financing
including group structure, debt structure, use of derivative
instruments, leasing arrangements, guarantees etc.
ii. Financial reporting and selection and application of accounting policies
Auditor needs to understand entity’s financial reporting and accounting
practices and policies including (ASA 315.11(c) and A28):
1. revenue recognition, accounting for fair value, forex issues
2. methods used to account for significant, unusual and/or complex
transactions
3. effect of lack of authoritative guidance or consensus
4. changes in accounting policies, e.g. depreciation
5. adoption of new standards, laws and regulations
iii. Entity’s objectives, strategies and related business risks
1. Business risks result from significant conditions, events, circumstances,
actions or inactions that could
adversely affect
an entity's ability to
achieve its objectives and execute its strategies, or from the setting of
inappropriate objectives and strategies (ASA 315 para. 4(b))
2. An entity’s strategies are the operational approaches by which management
intends to achieve its objectives
3. Some matters the auditor may consider include:
a) Developments in the industry
b) Expansion of the business, new products/services, e.g. ABC company
c) Current and prospective financing requirements
iv. Measurement and review of financial performance
1. Both internal and external measures are relevant and could exert
pressure
on management
(ASA 315.11(e) and A36-A41).
2. From an audit perspective, such measures include:
a) key ratios and operating statistics
b) key performance indicators
c) employee performance measures / incentive schemes
d) industry trends
e) forecasts, budgets and variance analysis
f) analyst reports and credit rating reports
Document Summary
Audit risk (ir / cr/ dr) (financial report / accounts / assertion) (financial report / accounts / assertion: levels of risk, engagement risk. Note: broader than risk of material misstatement of financial report (i. e. audit risk): audit risk. The risk that the auditor expresses an inappropriate audit opinion when the financial report is materially misstated (i. e. the auditor does not detect/report such misstatement) (asa 200. 13(c)). Note: achieved audit risk needs to be kept to an acceptably low level (asa. 500. a6), i. e. reasonable/high level of assurance provided to the users. 3 components (can be referred to lec 2 p. 3: detection risk: can be controlled by auditors, control risk: can be controlled by management, inherent risk: cannot be controlled by either, risk assessment objective - asa315. 3. Understanding the entity and its environment: external factors - asa315. 11(a) & a17-a22 (cid:43)(cid:80)(cid:70)(cid:87)(cid:85)(cid:86)(cid:84)(cid:91) (cid:52)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:81)(cid:84)(cid:91) (cid:39)(cid:69)(cid:81)(cid:80)(cid:81)(cid:79)(cid:75)(cid:69)(cid:2)(cid:69)(cid:81)(cid:80)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85) (cid:39)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2) (cid:72)(cid:67)(cid:69)(cid:86)(cid:81)(cid:84)(cid:85) (cid:39)(cid:80)(cid:86)(cid:75)(cid:86)(cid:91) (cid:48)(cid:67)(cid:86)(cid:87)(cid:84)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:71)(cid:80)(cid:86)(cid:75)(cid:86)(cid:91)(cid:28)(cid:2)(cid:49)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:29) (cid:49)(cid:89)(cid:80)(cid:71)(cid:84)(cid:85)(cid:74)(cid:75)(cid:82)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:73)(cid:81)(cid:88)(cid:71)(cid:84)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71)(cid:29)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85) (cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:72)(cid:67)(cid:69)(cid:86)(cid:81)(cid:84)(cid:85) (cid:53)(cid:71)(cid:78)(cid:71)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:82)(cid:82)(cid:78)(cid:75)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:67)(cid:69)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:81)(cid:78)(cid:75)(cid:69)(cid:75)(cid:71)(cid:85) (cid:49)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:86)(cid:84)(cid:67)(cid:86)(cid:71)(cid:73)(cid:75)(cid:71)(cid:85) (cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:79)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:71)(cid:88)(cid:75)(cid:71)(cid:89) Industry (e. g. market and competition, cyclical/seasonal activity, technological developments)
