Risk assessment procedure
understand the entity and its environment including internal control and asses the risk of material misstatement in the client’s financial statements
Quantity of risk assessment
- if you do little risk assessment whatever the result is you will need more substantive testing (st more expensive than ra) , but you saved some risk assessment cost
- if you more risk assessment if the results are favorable you can reduce substantive testing , but if its unfavorable you have to increase substantive testing
- the first case comes in the middle in cost
2 types of risk assessment
- audit risk model : concentrates on assessing risk and auditing detailed transactions and balances at the financial statements level . bottom - top approach
- business risk model : concentrates on assessing top level risks (macro risk , top governance risks) , top-bottom approach. if the top risks are low less substantive testing is needed , but if its more substantive testing is needed
the trade off between the audit risk model and business risk model
- if you use audit risk model whatever the result is more substantive testing will be needed (RA less than ST) , but you save some RA cost
- if you use business risk model and the results are favorable you can reduce ST at the financial statement level , but if its unfavorable you have to increase ST at the financial statement level , also the business risk model may come with more revenue as advisory costs to the client if the results can be sold of analysing business risks
- 1st case comes in the middle in terms of cost
Test of controls
if the preliminary control risk assessment is low or medium and the auditor wants to rely on internal controls to reduce substantive audit procedures he perform test of controls which are performed to obtain sufficient appropriate evidence to support the preliminary assessment of control risk which include inquiries of client personnel , examining documents records and reports observing related control activities and reperforming client procedures
Doing test of controls and substantive testing of transaction of balances together or individually
- If you do them individually you will incur some cost twice
- if you do them together and the result is favorable the audit firm will have done extra unneeded substantive testing (costly) , but if its unfavorable the audit firm have saved the recurring cost
- 1st case comes in the middle in cost
substantive test of details of balances
test ending general ledger balance for both balance sheet and income statement . test payable and receivable accounts and physical examination of tangible assets. they satisfy (completeness ,existence, accuracy ,classification, cutt off, detail tie in realizable value , rights and obligations ) ceac cdr
substantive analytical procedure
involve comparing recorded amounts to auditor expectation. they are required in the planning and completing stages by by the auditing standards and can be used as auditing substantive procedure and indicate possible misstatements in the financial statement
Selecting type of tests to be used
typically all 5 are use but it involves the availability of evidence ,the relative cost of each evidence , effectiveness of internal control , inherent risk , fraud risk , business risk
Relative cost of audit procedures
from least to most :
- analytical procedures
- risk assessment
- test of controls
- substantive test of transactions
- substantive test of details balances
substantive tests of transaction
designed to test for monetary misstatements that directly affect the correctness of financial statements balances these include (substantive tests of transaction ,substantive test of details of balances, substantive analytical procedure) . and they are used to determine weather all 6 transaction related audit objectives (completeness , occurrence , accuracy , posting ,summarization , classification ,timing ) have been sastisfied cos tac
