Page 76 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
1B. Selective Procedures: Auditors don't need to perform specific audit procedures on all areas. Instead, they
should design audit programs and procedures for areas identified as major risks that could lead to material
misstatements in the financial statements.
1C. Reduce Risk to Acceptable Level: The risk-based audit provides a framework to reduce the impact of
identified risks on the financial statements to an acceptable level before rendering an opinion. It also offers
indicators of risks as a basis for improving the auditee's risk management and control processes.
Usage
2A. Different Audits: Risk-based audit is a crucial part of financial audits, including attest audits of financial
statements and audits of financial systems, transactions, and internal controls. It primarily identifies and assesses
risks of financial statement misstatements.
2B. Application in Performance Audit: In the context of performance audits, risk-based audit focuses on the
risk to the delivery of an entity's activities or programs with economy, efficiency, and effectiveness. The risk
analysis provides a framework for assurance in performance auditing.

(CNO-MRI.160) Audit Risk Analysis
1. Auditor's Duty: Ensure financial statements are free from material misstatements due to error or fraud.
2. Risk Assessment: Auditor must assess audit risks impacting the auditee.
• It is the risk that the auditor may unknowingly fail to appropriately modify his opinion on financial
statements that are materially misstated.
• Subjective process influenced by professional judgment and specific circumstances.
3. Causes of audit risks:.
• Error: Unintentional mistakes.
o Omission: Excluding valid transactions/balances.
o Commission: Including erroneous transactions/balances.
• Fraud: Deliberate misstatements.
o Deceptive intent in accounting records.
o Aims to mislead or hide misappropriations.
4. Sources
Error Risks: Arises from principle mistakes, estimates, data processing, reporting process, or disclosure.
Fraud Risk: Involves manipulation, falsification, misrepresentation in statements, wrong application of
principles, or theft of funds.

(CNO-MRI.180) General Steps in the Conduct of Risk Based Audit
Overall Objective: The auditor’s objective in a risk-based audit is to obtain reasonable assurance that no material
misstatements whether caused by fraud or errors exist in the financial statements.
This involves the following three key steps / phases:
Risk assessment: Assessing the risks of material misstatement in the financial statements
Risk response: Designing and performing further audit procedures that respond to assessed risks and reduce the
risks of material misstatements in the financial statements to an acceptably low level; and
Reporting: Issuing an appropriate audit report based on the audit findings.

(CNO-MRI.200) Risk Assessment
Acceptance & Continuance Procedures: Performing client acceptance & continuance procedures.
Planning: Planning the overall engagement
RAP: Performing risk assessment procedures to understand the business and identify inherent and control risks.
Identifying & Assessing Risk: Assessing the risks of material misstatement in financial statements, identifying
significant risks requiring special audit consideration, and determining if substantive procedures alone are
sufficient.

www.auditguru.in 4.5