In this chapter, students will be able to understand: explain the factors that influence the assessment of inherent risk; explain the auditor’s consideration of the special risk areas of fraud, related parties and the appropriateness of the going concern basis; and explain the concept of materiality. | Chapter 7 Assessing Specific Business Risks and Materiality 7- Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Assessing risk of material misstatement AUS 406/ASA 330 (ISA 330) points out that when considering assessment of risk of material misstatement at assertion level, an auditor must relate these back to account balances/classes of transactions/disclosures. Needs to consider both the particular characteristics of each class of transaction, account balance or disclosure (inherent risks) and whether the auditor’s assessment takes account of the entity’s controls (control risk). 7- Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Inherent Risk (IR) Inherent risk: Susceptibility of account balance or class of transactions to material misstatement, given inherent and environmental characteristics, without regard to internal control structure. 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, assess related to assertions at account balance or class of transactions level when developing audit program. Learning Objective 1: 7- Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Business Risk (BR) and IR Entity’s business strategy and associated risks will affect an auditor’s assessment of IR at the financial report level. Where an auditor can trace BRs to areas of a financial report which are likely to be misstated, this gives rise to a higher IR assessment for that area. 7- Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and . | Chapter 7 Assessing Specific Business Risks and Materiality 7- Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Assessing risk of material misstatement AUS 406/ASA 330 (ISA 330) points out that when considering assessment of risk of material misstatement at assertion level, an auditor must relate these back to account balances/classes of transactions/disclosures. Needs to consider both the particular characteristics of each class of transaction, account balance or disclosure (inherent risks) and whether the auditor’s assessment takes account of the entity’s controls (control risk). 7- Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett Inherent Risk (IR) Inherent risk: Susceptibility of account balance or class of transactions
