Page 87 - CA Final PARAM Digital Book.

There are five components of an internal
control framework. They are as follows:
1. Control Environment;
2. Risk Assessment;
3. Information & Communication;
4. Monitoring;
5. Control Activities

Component (Control Environment-Communication of Integrity &
40.010 Ethical Value) Old Course – (N18R, SM21)
TITANIUM CNO—MRI.380
The effectiveness of controls cannot rise above the integrity and ethical values of the people who create,

administer, and monitor them. Explain.
Answer ➢ Communication and enforcement of integrity and ethical values. The effectiveness of controls
cannot rise above the integrity and ethical values of the people who create, administer, and monitor

them. Integrity and ethical behavior are the product of the entity’s ethical and behavioral standards,
how they are communicated, and how they are reinforced in practice. The enforcement of integrity
and ethical values includes, for example, management actions to eliminate or mitigate incentives
or temptations that might prompt personnel to engage in dishonest, illegal, or unethical acts. The
communication of entity policies on integrity and ethical values\ may include the communication of
behavioral standards to personnel through policy statements and codes of conduct and by
example.
Author’s Note
If people who create, implement and maintain systems are honest, sincere, unbiased then systems will
work with honesty, sincerity and in unbiased manner. So, it depends on ethical values of people who create
maintain and implement it.

Identify & Assess RMM & Response to Risk
40.100 Old Course – (N14E, M17R, PM17, M18R, N18E)
TITANIUM CNO—Unique
While commencing the statutory audit of Alex Co Ltd, what would you consider as an auditor to assess risk

of material misstatement and responses to such risks?
Answer Part I -- Relevant Standards & Laws
▪ SA 315, Identifying And Assessing The Risk Of Material Misstatement Through Understanding The

Entity And Its Environment.
Part II -- Requirements of Relevant Standards & Laws

➢ RMM at 2 Levels: - Financial Statement Level & Assertion Level
The auditor shall identify and assess the risks of material misstatement at:
The financial statement level; an
The assertion level for classes of transactions, account balances, and disclosures; to provide
a basis for designing and performing further audit procedures.

➢ 4 Steps in Identifying & Assessing Risk
Identify risks while obtaining understanding /Identify which assertions will get
affected / Identify whether risks are affecting financial statement as a whole and
affecting many assertions / Consider likelihood and Magnitude of Misstatement and
whether there could be Material Misstatement
For this purpose, the auditor shall:
• Identify risks throughout the process of obtaining an understanding of the entity
and its environment, including relevant controls that relate to the risks, and by
considering the classes of transactions, account balances, and disclosures in the

www.auditguru.in PARAM 4.4 | P a g e