Page 74 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
Risk of Material Misstatement: This that a material misstatement may exist in the financial statement before
the start of the audit. It has two components - Inherent Risk and Control Risk.
The relationship can be defined as
Risk of material Misstatement = Inherent risk x Control risk
So Audit Risk = Inherent Risk x Control Risk x Detection Risk.
Objective: The main objective of the audit is to reduce audit risk to an acceptable level. This is achieved by
assessing the risks of material misstatement and limiting the detection risk.
Inverse Relationships: The combined level of Inherent Risk and Control Risk is inversely related to Detection
Risk. Also, Audit Materiality is inversely related to Audit Risk.

(CNO-MRI.060) Assertions
SA 315: This standard provides guidelines for identifying and assessing the risks of material misstatement
through understanding the entity and its environment.
Assertions: Representations made (Information given) by management through financial statements. Auditor
examines them for potential material misstatements.
Types of Assertions: SA 315 categorizes the types of assertions used by auditors to consider the different types
of potential misstatements that may occur.
Assertions about classes of transactions and events for the period under audit:
Occurrence: All recorded transactions and events have actually taken place and are relevant to the entity.
Completeness: All transactions and events that should have been recorded have been included in the financial
statements.
Accuracy: The amounts and other data related to recorded transactions and events are correctly recorded.
Cut-off: Transactions and events are recorded in the appropriate accounting period.
Classification: Transactions and events are recorded in the correct accounts.
Assertions about account balances at the period end:
Existence: All assets, liabilities, and equity interests actually exist.
Completeness: All assets, liabilities, and equity interests that should have been included in the financial
statements are present.
Valuation and Allocation: The assets, liabilities, and equity interests are included in the financial statements at
appropriate amounts, and any adjustments related to valuation or allocation are accurately recorded.
Rights and Obligations: The entity has the legal rights to the assets, and the liabilities are the entity's obligations.
Assertions about presentation and disclosure:
Occurrence and Rights and Obligations: Disclosed events, transactions, and other matters have occurred and
pertain to the entity.
Completeness: All disclosures that should have been included in the financial statements have been included.
Accuracy and Valuation: Financial and other information are disclosed fairly and at appropriate amounts.
Classification and Understandability: Financial information is appropriately presented and described, and
disclosures are clearly expressed.

(CNO-MRI.080) RMM at FST Level
1. RMM at FST Level: Auditors are required to evaluate the risks of material misstatement at the overall financial
statement level. These risks can potentially affect multiple assertions within the financial statements.
2A. Competency of top accountant: The competency of the top accountant is crucial. Inadequate competence
can lead to errors in the financial statements, which are unlikely to be limited to a single account balance,
transaction stream, or disclosure.
2B. Impact of Lack of Competency: Errors due to lack of competency can affect various assertions, including
completeness, accuracy, existence, and valuation. These errors can have a wide-ranging impact on the financial
statements.

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