Page 72 - CA Inter Bhaskar Vol 1

RISK ASSESSMENT AND INTERNAL CONTROL CA RAVI TAORI

Accordingly, some control risk will always exist. The SAs provide the conditions under which the
auditor is required to, or may choose to, test the operating effectiveness of controls in determining
the nature, timing and extent of substantive procedures to be performed.

Combined Vs Separate Assessment
The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a combined AUDIT BHASKAR CH 03 - PART 01
assessment of the “risks of material misstatement”. However, the auditor may make separate or
combined assessments of inherent and control risk depending on preferred audit techniques or
methodologies and practical considerations. The assessment of the risks of material
misstatement may be expressed in quantitative terms, such as in percentages, or in non-
quantitative terms. In any case, the need for the auditor to make appropriate risk assessments is
more important than the different approaches by which they may be made.
(In big assignments go for separate analysis, further if auditor is relying extensively on test of
controls, then separate analysis id preferred)

Chart of
RMM RISK OF MATERIAL MISSTATEMENT (RMM)

Chances that FST are materially misstated
Definition
Presented to auditor prior to audit
Inherent Risk
Components
Control Risk
Matter of Prof Rather than matter of capable
Judgement of precise measurement

Relates to Overall response
FST Level
whole FST by auditor
2 Levels
Assertion Relates to Auditor decides
Level TBD assertion NTE of FAP
Audit procedures performed
Basis of RMM
Info/Evidence obtained

Note:- Response of auditor reduces risks to acceptably low level

Risk of Definition
Material The risk that the financial statements are materially misstated prior to audit.
Misstatement
(QNO- Components
315.11.)
As per SA 200, the risks of material misstatement at the assertion level consist of two
(MCQ 315.2, components: inherent risk and control risk.
315.3, 315.13)

Inherent Risk--Definition and Its Explanation
Control Risk -- Definition and Its Explanation

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