Professional judgment
SSA 200.13(k) - appropriate application of relevant training,
knowledge and experience in making informed decisions
- estalis!ing materialit"
- assessing vario#s t"pes of risks
- allocating e$ort etween tests of controls and s#stantive testing
- eval#ating e$ectiveness of controls
- selecting a#dit proced#res
- external in%#ences (&rm c#lt#re and risk management process,
state of econom")
SSA 200.13(l) - professional skepticism' a (#estioning mind eing
alert to conditions w!ic! ma" indicate possile misstatement
Appl" on'
- #nderl"ing management)s estimates and data
- going concern ass#mption and s#se(#ent events
- s"stem generated reports, management reports
- work of specialists and external experts
test for integrit" and acc#rac" of report efore reliance
*nder SSA 2+0, a#ditors are re(#ired to consider t!e risk of fra#d
t!ro#g!o#t t!e a#dit
,ra#d risks'
-place of compan" (emerging markets)
-related part" transactions
-reven#e recognition (review trends)
-alteration of con&rmation' eval#ate appropriateness
A#diting impairment of non &nancial assets
Step 1' identif" indicators of impairment (,-S 3..12)
Step 2' /val#ate fair val#e less cost to sell
Step 3' /val#ate pro0ected cas! %ow ass#mptions #sed to determine
val#e in #se of an asset
Step +' eval#ate risk-free disco#nt rates - e alert to increased
sovereign risk as t!e "ields on government sec#rities !ave trended
down
Step 1' eval#ate market conditions after "ear-end
A#dit planning
SSA300 - Planning an audit of FS
involves estalis!ing overall a#dit strateg" for engagement and
developing an a#dit plan
SSA 320 para 2 - Misstatements, including omissions are
considered to be material if t!e", individ#all" or aggregate, co#ld
reasonal" e expected to in%#ence t!e economic decisions of
#sers taken on t!e asis of ,S
SSA 320 - Assessing risk of material misstatement
2onsider materialit" at ot! overall ,S level and in relation to
individ#al acco#nt alances. classes of transactions and disclos#res
SSA 31 - !dentif"ing and accessing risk of material
misstatements t#roug# understanding t#e entit" and t#e
en$ironment
3etermining materialit"
1. 2!oose enc!mark
- nat#re of entit" (p#ic 4 !ig!er risk as exposed to more investors)
- economic environment (#ncertaint")
- owners!ip str#ct#re
- &nancing (sec#red loans5 net assets, forward cas! %ows)
2. deciding on t!e val#e
- level of p#lic interest
- det arrangements
- volatilit" of environment
- !ig!l" reg#lated5 (!ig! 4 more risk as more e"es looking at "o#.
so !ave to do a
Assess risk level " ,S assertion'
2ompleteness, existence, acc#rac", val#ation, oligations and
rig!ts, presentation
A6S 7 8"pe 99 report
(:) - -eport on w!et!er t!e control proced#res are fairl" descried,
were s#ital" designed to ac!ieve speci&ed control o0ectives, !ad
een placed in operations as of a speci&c date, and on w!et!er t!e
controls were operating wit! s#;cient e$ectiveness to provide
reasonale, #t not asol#te, ass#rance t!at t!e related control
o0ectives were ac!ieved d#ring t!e period speci&ed
Audit sampling - SSA 30
So t!at all sampling #nits !ave a c!ance of selection in order to
provide a#ditor wit! a reasonale as on w!ic! to draw concl#sions
ao#t t!e entire pop#lation
Sampling risk
-isk t!at a#ditor<s concl#sion ased on a sample ma" e di$erent
from t!e concl#sion if t!e entire pop#lation were s#0ected to t!e
same a#dit proced#re
/xamples'
1. Sampling risk t!at a$ect a#dit e$ectiveness
a. :ased on res#lts of 8=2, a#ditor concl#ded t!at internal controls
are e$ective w!en t!e" are not
- :eca#se a#ditor wo#ld !ave red#ced 8=3 w!en s#c! red#ction is
inappropriate, leading to ins#;cient evidence eing gat!ered >rong
a#dit opinion ma" e expressed
. :ased on res#lts of s#stantive proced#res, a#ditor concl#ded
t!at t!ere are no material misstatements w!en material
misstatements act#all" existed (wrongl" concl#ded ,S are tr#e and
fair)
2. Sampling risk t!at a$ects a#dit e;cienc"
?erforming additional work w!ic! ma" e #nnecessar" (increase
8=3 #nnecessaril")
a. :ase on test of control, a#ditor concl#ded t!at controls are not
operating e$ectivel" w!en t!e" are. @eading to a#ditor to increase
extent of 8=3 w!en not necessar" to do so
. :ased on 8=3, a#ditor concl#ded t!at a material misstatement
exists w!en it does not 4 a$ect a#dit e;cienc", as it wo#ld #s#all"
lead to additional work to estalis! t!at initial concl#sions were
incorrect
-ed#cing non-sampling risk
- proper planning
- Assign (#ali&ed and experienced a#dit sta$
- Ade(#ate s#pervision
Audit risk % risk of material misstatement and detection risk
-isk of material misstatements 4 in!erent risk and control risk
3etection risk 4 sampling risk and non sampling risk
A- 4 9- A 2- A 3-