Chapter 4: Section 1

Question 1

What does IAS 315 define risk assessment procedures as?

Answer 1

The audit procedures designed and performed to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels

Question 2

What does risk assessment help the auditor do?

Answer 2

Helps to prepare the auditor by planning the audit effectively to deliver a valid opinion

Question 3

Since audit opinions are full of uncertainty, what do auditors need to do?

Answer 3

Plan for possible cases of fraud or error jeopardising the truth and fairness of the financial statements which they might not detect

Question 4

What can the two levels of risk mentioned by the extract from ISA 315 do?

Answer 4

Each can influence the opinion given by the auditor

Question 5

What are the two levels of risk which ISA 315 makes references to in the extract?

Answer 5

Financial statement level
Assertion level

Question 6

What is financial statement level risk?

Answer 6

Where there is a possibility certain factors might have a detrimental effect on the whole set of financial statements

Question 7

Give an example of a financial statement level risk?

Answer 7

E.g., flaws in the control environment, an overall lack of management integrity or even adverse economic conditions which could lead to the entire set of statements being affected

Question 8

What is assertion level risk?

Answer 8

Where there may only be one specific element of the financial statements that is at risk of material misstatement due to problems with one or more characteristics of that element

Question 9

Give examples of assertion level risks

Answer 9

E.g., if material assets listed on the SFP are incorrectly valued, there is a material misstatement in respect of them due to the assertions made by management about their value

Question 10

What does ISA 315 go on to list about an entity’s risk assessment process and what does it use to do this?

Answer 10

List the circumstances that should be considered as part of an entity’s risk assessment process, using categories that include complexity, subjectivity, change, uncertainty and susceptibility to misstatement as a result of fraud or management bias.

Question 11

What are the 9 circumstances in the book that should be considered as part of an entity’s risk assessment process?

Answer 11

1. Changes in the operating environment (regulatory or even competitive)
2. New personnel within an organisation
3. New or revamped information systems
4. Rapid growth
5. New technology
6. New business models, products or activities
7. Corporate restructurings
8. Expanded foreign operations
9. New accounting pronouncements

Question 12

Why does the external auditor face a serious problem when agreeing to deliver and audit opinion?

Answer 12

Could easily be discredited if has not taken into consideration all available info and auditor’s expertise

Question 13

How does the auditor make sure info and expertise has been taken into consideration so an audit opinion is not easily discredited?

Answer 13

Answer lies in understanding the risk faced by auditors and working to control them by use of the audit risk model.