Risk assessment and other assurance engagements

Question 1

Business risk

Answer 1

Risk that could adversely affect an entity’s ability to achieve its objectives

Question 2

Categories of business risk

Answer 2

Financial risks
Operational risks
Compliance risks

Question 3

Audit risk

Answer 3

Risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

Question 4

Audit risk calculation

Answer 4

Audit risk = inherent risk x control risk x detection risk

Question 5

Inherent risk

Answer 5

A factor that increases the susceptibility of an assertion to misstatement that could be material

Question 6

Control risk

Answer 6

Risk that a misstatement will not be prevented on a timely basis by the entity’s internal control

Question 7

Inherent risk factors

Answer 7

Complexity
Subjectivity
Change
Uncertainty
Susceptibility of bias and fraud

Question 8

Spectrum of inherent risks

Answer 8

Each inherent risk factor is considered in terms of likelihood and materiality of a misstatement and plotted on a spectrum in terms of high and low
- Audit risk deemed to be significant when in plots high on the spectrum

Question 9

Types of control

Answer 9

Indirect controls - affect risk of material misstatement at a financial statement level
Direct controls - affect risk of material misstatement at an assertion level

Question 10

Detection risk

Answer 10

Risk that the procedures performed by the auditor to reduce audit risk will not detect a misstatement that exists

Question 11

Components of detection risk

Answer 11

Sampling risk - material misstatement not discovered due to not sampling 100% of the transactions
Non-sampling risk - Other factors such as poor approach / rushed / lack objectivity

Question 12

Scalability (ISA 315)

Answer 12

All requirements of an ISA should be implemented regardless of the size or complexity of the client

Question 13

Visualisation tools in the Explore Module

Answer 13

Stacked bar charts
Bump chart
Heat map
Tree map

Question 14

Types of metric prepared by the Metrics Module

Answer 14

Financial ratios - show relationship between two or more accounts
Financial information - show amounts taken from the accounts
Best used when question asks for analytical procedures

Question 15

Risk assessment ISAs

Answer 15

ISA 315
ISA 320
ISA 330

Question 16

ISA 315

Answer 16

Understanding the entity and its environment
Identify risk of material misstatements

Question 17

ISA 320

Answer 17

Set materiality influenced by risks identified

Question 18

ISA 330

Answer 18

Create response to the risks of material misstatement
Design and perform further audit procedures whose nature, timing and extent are based on / in response to the assessed risks of material misstatement at the assertion level

Question 19

Sources of audit confidence

Answer 19

Internal controls ascertained by the auditor and documented
Controls relating to significant risks evaluated via a walkthrough
Tests of controls - audit judgement on effectiveness of controls
Amount of substantive testing impacted by confidence in internal controls
- tests on controls can reduce substantive testing

Question 20

Types of substantive procedures

Answer 20

Tests of details - gain evidence on account balances and transactions that represent significant risks
Analytical procedures - appropriate for large volumes of predictable transactions which can be reviewed for consistent trends and relationships

Question 21

Controls testing

Answer 21

Obtain evidence that the control is effective / was effective throughout the period under review
Test systematically
Verify that the control objectives were achieved by looking at the evidence
Consider what the control was designed to achieve and how to test that it worked as it was supposed to

Question 22

Amount of substantive testing

Answer 22

Depends on the results of any controls testing done - combination of tests is part of reducing detection risk to an appropriate level
Controls operate at an effective level = reduced substantive testing
Controls not operating at an effective level = additional substantive testing
Controls not tested at all = enough substantive testing must be done to reduce the overall audit risk to an acceptable level

Question 23

Data analytics

Answer 23

The use of technology through the audit to improve audit quality
Used in all stages of the audit
- Planning and risk assessment
- Substantive testing
- Testing controls

Question 24

Examples of other assurance engagements

Answer 24

Auditor’s report
Report on Review of Historical / Prospective Financial Information

Question 25

Engagement caveats

Answer 25

Review of prospective financial information - future may be different to predicted performance
Review of historical information
- the review is not an audit

Question 26

Terms of assurance engagement

Answer 26

Who the user is and why they are using the information
Who will be able to access the information
How much assurance can be offered
What report is required
What period the assurance covers
Whether the firm has suitable skills and resources
Whether there are any ethical barriers to taking the engagement

Question 27

Limited assurance engagement - limitation of scope

Answer 27

Material - qualify negative assurance explaining the possible adjustments to the financial statements
Pervasive - do not provide any assurance

Question 28

Limited assurance engagement - misstated
“Matters have come to the attention of the assurance provider”

Answer 28

Material - qualify negative assurance explaining the adjustment to the financial statements
Pervasive - give an adverse statement that the financial statements do not give a true and fair view