Auditor’s Response to Assessed Risk (ISA 330 ISA 500)
9.1 Learning Objectives
After studying this chapter, you should be able to:
1 List audit procedures responsive to assessed risk
2 Know the definition of evidence in an audit and legal sense. 3 Differentiate between nature, extent and timing of audit procedures. 4 Understand the difference between legal evidence and audit evidence. 5 Identify the common management assertions for classes of transactions, account balances and disclosure. 6 Define the management standard assertions: completeness, occurrence, accuracy, rights and obligations, valuation, existence, cutoff, classification, understanding, presentation and disclosure, and measurement. 7 Discuss the systematic process of gathering evidence.
8 Recognize tests of controls for design and effectiveness. 9 Charaterize a substantive procedure.
10 Explain what is meant by the nature, timing, and extent of substantive procedures. 11 List and define the two types of substantive procedures. 12 Realize the process of search for unrecorded liabilities. 13 Describe the components of and the meaning of “sufficient appropriate audit evidence.” 14 Determine which evidence is relevant and which evidence is reliable.
Evidence gathering procedures in auditing are directed by the assessment of risk of material misstatement. ISA 330 states1, “The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement, through designing and implementing appropriate responses to those risks.”
Audit Procedures Responsive to the Assessed Risks of Material Misstatement at the Assertion Level To meet this objective of obtaining sufficient appropriate audit evidence, the auditor must design and perform audit procedures whose nature, timing and extent are based on, and are responsive to, the assessed risks. The nature of an audit procedure refers to its purpose (that is, test of controls or substantive procedure) and its type (that is, inspection, observation, inquiry, confirmation, recalculation, reperformance, or analytical procedure). The nature of the audit procedures is of most importance in responding to the assessed risks. Timing of an audit procedure refers to when it is performed, or the period or date to which the audit evidence applies.2 Extent of an audit procedure refers to the quantity to be performed, for example, a sample size or the number of observations of a control activity. Designing and performing further audit procedures whose nature, timing and extent are based on and are responsive to the assessed risks of material misstatement at the assertion level provides a clear linkage between the auditor’s further audit procedures and the risk assessment. The auditor’s assessment of the identified risks at the assertion level provides a basis for considering the appropriate audit approach for designing and performing further audit procedures. For example, the auditor may determine that only by performing tests of controls she can achieve an effective response to the assessed risk of misstatement for a particular assertion.3 Or the auditor may find that performing only substantive procedures is appropriate for particular assertions and, therefore, she excludes the effect of controls from the relevant risk assessment. This may be because the auditor’s risk assessment procedures have not identified any effective controls relevant to the assertion, or because testing controls would be inefficient and therefore the auditor does not intend to rely on the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures. Of course, the auditor may try a combined approach using both tests of controls and substantive procedures. Irrespective of the approach selected, however, the auditor designs and performs substantive procedures for each material class of transactions,...
References: Knapp, M., 2001, “Mattel, Inc,” Contemporary Auditing Real Issues & Cases, South Western College Publishing, Cincinnati, Ohio. pp.3–14.
SEC, 1981, Accounting Series Release No. 292, “SEC Charges Mattel, Inc. with Financial Fraud,” US Securities and Exchange Commission, June 22.
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