Page 87 - CA Inter Bhaskar Vol 1

CA RAVI TAORI STEP - 2A FINANCIAL STATEMENT LEVEL RISK
RISK ASSESSMENT AND INTERNAL CONTROL
AUDIT BHASKAR CH 03 - PART 01 Statement 1) Definition When circumstances or conditions related to risk are such that MST

Financial

can happen in any part of FST it is called FST Level Risk.
Level
It is not affecting specific TBD assertion, it is affecting many
items and assertions
2) Following are examples of FST Level Risk

If there is lack of integrity anywhere, manipulations can be
done. If integrity issue further rises and becomes big, auditor
i) Mgt Integrity
may withdraw from assignment
ii) Deficient
Control
is weak anywhere, things may go wrong
Environment
iii) Conditions Control Environment means attitude of mgt towards ICS. If it
affecting This is again FST level risk. E.g. Bug in A/c software, cyber
reliability of attack etc. If problem is wide spread and auditor is not able
accounting to rely on accounting records, he may qualify or give Disclaimer
records

Assessment of Risks of Material Misstatement at the Financial Statement Level

Meaning
Risks of material misstatement at the financial statement level refer to risks that relate
pervasively to the financial statements as a whole and potentially affect many assertions. Risks
of this nature are not necessarily risks identifiable with specific assertions at the class of
transactions, account balance, or disclosure level. Rather, they represent circumstances that may
increase the risks of material misstatement at the assertion level, for example, through
management override of internal control. Financial statement level risks may be especially
relevant to the auditor's consideration of the risks of material misstatement arising from fraud.

Effect of Control Environment
Risks at the financial statement level may derive in particular from deficient control environment
(although these risks may also relate to other factors, such as declining economic conditions). For
example, deficiencies such as management's lack of competence may have a more pervasive
effect on the financial statements and may require an overall response by the auditor.

Auditability of Financial Statements
Understanding of Internal Control System may result in following
Concerns about the integrity of the entity's management may be so serious as to cause
the auditor to conclude that the risk of management misrepresentation in the financial
statements is such that an audit cannot be conducted.
Concerns about the condition and reliability of an entity's records may cause the auditor
to conclude that it is unlikely that sufficient appropriate audit evidence will be available
to support an unqualified opinion on the financial statements.
SA 705, “Modifications to the Opinion in the Independent Auditor's Report” establishes
requirements and provides guidance in determining whether there is a need for the
auditor to consider a qualification or disclaimer of opinion or, as may be required in some
cases, to withdraw from the engagement where this is legally possible.

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