Page 72 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori

04 MATERIALITY, RISK ASSESSMENT AND

INTERNAL CONTROL

Case Study-- CA. Y
Recurring Audit: Doing Audit for past 3 years, he is doing same risk assessment every year. He is doing things
Same As Last year (SAL Approach). He is thinking is it really useful? After attending seminar, he got following
understanding.
Mandatory: Assessing audit risk is not only mandatory under Standards on Auditing but also enhances audit
effectiveness and quality.
Helps in Planning: Audit risk assessment helps in better audit planning by identifying areas prone to
misstatements due to errors or frauds.
Can change year over year: The risk assessment is not static and can change year over year due to factors such
as changes in laws, business model, industry developments, etc.
Business-Risks: Understanding the company's business risks and its strategies to deal with them influences the
audit risk. Evaluating these plans provides comfort regarding management's ability to handle such risks.
Controls: Evaluating a company's controls helps identify areas with deficient or non-existent controls, which
increases the risk of material misstatement.
RAP: Using risk assessment procedures like inquiries, inspection, and observation, auditors can understand areas
of risks of material misstatement, leading to a more effective and qualitative audit.
Significant Deficiencies: If significant deficiencies in the internal control system are identified, the auditor has
a responsibility to communicate these to the management. This not only prompts corrective actions but also
protects the auditor as they have taken pre-emptive steps.

Initial Portion of this Chapter covers concepts from SA 315

(CNO-MRI.020) Materiality & Risk Assessment
Materiality Uses: Applied during planning, performance of audit, evaluating misstatements' effects, and impacts
opinion formation in the auditor’s report.
Audit Risk Uses: Applied throughout audit. identifying/assessing risks, determining audit procedures, and
evaluating misstatement effects on financial statements and report.
Risk Assessment Process: Evaluates risk across business processes by considering the business and regulatory
environment, organizational structure and changes, and concerns of management and audit committee; aims to
determine areas of greatest risk.

(CNO-MRI.040) Audit Risk Components
Inherent Risk
Basic
1A. Definition: Susceptibility of an assertion to a misstatement that could be material, individually or when
aggregated with other misstatements, assuming that there are no related controls.
1B. Identified at two Levels: Inherent risk is identified at two levels - the financial statement level (overall risk
to the financial statements) and the assertion level (specific assertions within the financial statements).
1C. Example: Technological changes can render a product obsolete, raising the risk of inventory overstatement.
Additional Points

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