Page 92 - CA Inter Bhaskar Vol 1

RISK ASSESSMENT AND INTERNAL CONTROL CA RAVI TAORI

As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the
auditor's judgment, a significant risk. In exercising this judgment, the auditor shall exclude the effects of
identified controls related to the risk.

In exercising judgment, as to which risks are significant risks, the auditor shall consider at least the
following: AUDIT BHASKAR CH 03 - PART 01
(CFO-CSR)

Whether the risk is related to recent significant economic, accounting, or other developments like
changes in regulatory environment, etc. and therefore, requires specific attention;
Whether the risk is a risk of fraud;
Whether the risk involves significant transactions that are outside the normal course of business
for the entity, or that otherwise appear to be unusual.
The complexity of transactions;
The degree of subjectivity in the measurement of financial information related to the risk,
especially those measurements involving a wide range of measurement uncertainty; and
Whether the risk involves significant transactions with related parties;
When the auditor has determined that a significant risk exists, the auditor shall obtain an
understanding of the entity's controls, including control activities, relevant to that risk.

(CNO-SA315-P1.140) IDENTIFYING SIGNIFICANT RISKS (QNO-315.26)
Chart
IDENTIFYING SIGNIFICANT RISK

1) Def of Significant Risk Same as above

2) Sources of Significant Risk Here they want to explain root causes of significant risk
A) Non Routine Transactions
Transactions which are generally rare

i) Manual intervention in automated systems
ii) Mgt intervention in accounting issues & treatment
iii) Complexity in transactions or accounting Non-routine transactions
lead to significant risk because there are no internal control systems
to handle such transactions.
B) Significant FST items where lot of judgement is required for accounting
Judgement Matters they are called Significant Judgement matters
i) Subjective & Complex Judgements or future
action related judgements
E.g. Goodwill Valuation, Going Concern Validity
Examples
ii) Different interpretations are available in
accounting stds for treatment of estimates
& revenue recognition & both appear justified

i) Risk of material misstatement due to fraud
C) Always Considered
Significant Risk ii) Significant Related Party Transaction + Outside
normal course of business

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