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Lecture Auditing and assurance services in Australia (4th ed): Chapter 7 - Grant Gay, Roger Simnett

Chapter 7 - Assessing specific business risks and materiality. In this chapter we will discuss: explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance; indicate the purpose and content of an audit engagement letter; describe the decisions made by an auditor in preparing an audit plan, the knowledge on which the decisions are based and the procedures used to obtain that knowledge. | Chapter 7 Assessing specific business risks and materiality 7- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Assessing risk of material misstatement As discussed in chapter 5 and outlined in ASA/ISA 200: Risk of material misstatement may exist at both the financial report level and at the assertion level Risk of material misstatement at the assertion level consists of two components: inherent risk and control risk. ASA 315/ISA 315 requires the auditor to identify and assess risk of material misstatement at both the financial report and assertion levels. Inherent risk is covered in chapter 7, control risk in chapter 8. 7- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Learning objective 1: Inherent risk Inherent risk (IR): Susceptibility of account balance or class of transactions to material misstatement given inherent and environmental characteristics, but without regard to internal control. An assessment of IR and control risk (CR) can be combined or separate. Irrespective of this, an auditor is required to: Assess IR at financial report level for audit plan. Assessment must then be related to assertions at account balance or class of transactions level when developing audit program. 7- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Business risk (BR) and IR An entity’s business strategy and associated risks will affect an auditor’s assessment of IR at the financial report level. Where possible, an auditor traces BRs to areas of a financial report which are likely to be misstated. 7- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in . | Chapter 7 Assessing specific business risks and materiality 7- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Assessing risk of material misstatement As discussed in chapter 5 and outlined in ASA/ISA 200: Risk of material misstatement may exist at both the financial report level and at the assertion level Risk of material misstatement at the assertion level consists of two components: inherent risk and control risk. ASA 315/ISA 315 requires the auditor to identify and assess risk of material misstatement at both the financial report and assertion levels. Inherent risk is covered in chapter 7, control risk in chapter 8. 7- Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Learning objective 1: Inherent risk Inherent risk (IR): Susceptibility