Page 76 - CA Inter Bhaskar Vol 1

RISK ASSESSMENT AND INTERNAL CONTROL CA RAVI TAORI

1. Few examples of inherent risks could include: -
Complex Accounting Guidance: An accounting standard provides guidance on some complex
issue which might not be understood by the management. Therefore, recording of this issue in
financial statements carries inherent risk of being misstated.
Industry Business Failures: There are large number of business failures in an industry.
Therefore, assertions in financial statements of an entity operating in such an industry carry AUDIT BHASKAR CH 03 - PART 01
an inherent risk of being misstated.

2. Examples of control risk could include: -
Locked Safe Control: A company has devised control that cash and cheque books should be
kept in a locked safe and access is granted to authorized personnel only. There is risk that
control is not being followed.
Fire Safety Measures: An entity has devised a control that fire extinguishers and smoke
detectors are in place and are in working condition at all times to reduce the risk of damage to
inventories caused by fire. There is a risk that fire extinguishers in place are expired and are not
being refilled.
Smoke Detector Compliance: Similarly, there is a possibility that smoke detectors are not
working.
Petty Cash System: A company has devised a control relating to petty cash that items of
expenditure of only less than ` 10000 should be routed through imprest system of petty cash.
There is a risk that control is not being followed.

3. Examples of detection risk could include: -
Inventory Audit Practices: Sizeable work-in-progress inventories are expected in financial
statements, but the auditor does not attend inventory counts, opting for alternative
procedures.
Revenue Sampling Risks: The auditor audits company revenue by sampling, with the risk that
the sample may not reflect the total revenue accurately.

(CNO--SA315-P1.030) OBJECTIVE OF AUDITOR AS PER SA 315
Chart
1. Understand entity & its environment including ICS (RAP)

3. Design & implement
This provides 2. Identify & This provides responses to reduce audit
basis Assess RMM basis
risk to acceptable level
At 2 levels Due to Fraud or Error

FST Assertion

Factors As per SA 315 - “Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and its Environment”, the objective of the auditor is to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and assertion levels,
through understanding the entity and its environment, including the entity's internal control, thereby
providing a basis for designing and implementing responses to the assessed risks of material
misstatement. This will help the auditor to reduce the audit risk to an acceptably low level.

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