GROUP 9
Risk response
Presented by: Daniella Ann L. Destura
Joanne E. Nugit
Learning outcomes
1. Know the activities undertaken in the risk
response phase in the risk-based audit approach
2. Describe the types of response to the assessed
risks of material misstatements both at the financial
statement level and at the assertion level.
3. Understand the nature of the audit procedures to
gather sufficient appropriate audit evidence to
reduce audit risk to an acceptably low level.
4. Know the relationship between audit techniques,
audit procedures and assertions.
[Link] when to perform tests of controls and
substantive procedures.
Designing an effective response to
assessed risks
Performance of further audit procedures
(i) Performing Planned Procedures
(ii) Assessing Results
(iii) Document Findings
The auditor shall design and implement overall
responses to address the risks identified and assessed
DESIGNING OVERALL AUDIT responses at the: financial statement level; and assertion level for
(i) Updating Strategy financial statement areas and disclosures.
(ii) Developing Response
(iii) Briefing Team An assessment of the risks of material misstatement is
required at the financial statement and assertion levels
to obtain evidence that addresses risk assessments
developed for each relevant assertion.
Listing of assessed risks
Developed at conclusion of risk
assessment phase
Areas that the auditor would address in developing an overall
response shall include the determination of:
● The extent that the audit team needs to be reminded about
the use of professional skepticism;
● Which staff to assign, including those with special skills, or
whether to use experts:
● The extent of supervision required throughout the audit;
● The need for incorporating some elements of unpredictability
in the selection of further audit procedures to be performed;
and
● Any general changes that need to be made to the nature,
timing, or extent of audit procedures. These could include the
timing of procedures (interim or period-end), or new/extended
procedures to address specific risk factors such as fraud.
In developing the detailed audit plan, the auditor would use his/her professional
iudgement to select the appropriate types of possible audit procedures. To obtain the
required reasonable assurance, the auditor applies the audit procedures that' in the
judgment and based on the PSAs are deemed appropriate in the circumstances and in
determining the audit procedures to be performed in conducting an audit in accordance
with Philippine Standards on Auditing, the audits should comply with each of the PSAs
relevant to the audit.
Nature of Audit procedures
An effective audit program will be based on an
appropriate mix of procedures that collectively
reduce audit risk to an acceptably low level.
Audit procedures are the methods or acts that
auditors use to gather evidence to determine the
validity of financial statement assertions. One
way for the auditors to increase the amount of
evidence obtained is to select a more effective
audit procedure.
For example, if the auditors want to increase the
amount of evidence about the existence of
accounts receivable, they could decide to
confirm the accounts rather than rely upon the
inspection of internal documents.
The various types of an audit procedures available to the auditor are categorized as follows.
I.
Test Of Controls Or Compliance Tests
These are audit procedures designed to evaluate the operating effectiveness of controls in
preventing, or detecting and correcting, material misstatements at the assertion level.
Types Of Compliance Tests
1) No Trail
This type does not leave a visible trail m the supporting documents of the performance of
control procedure by the client's employee.
The auditor makes inquiries and observation of office personnel and routines to determine
how control procedures are performed and who performs them.
2) Documentary Trail
This type leaves a visible trail in the supporting documents. Hence, the auditor inspects the
documents supporting a particular type of transaction to see whether a control procedure,
such as approval or other checking, was performed and who performed it as indicated by
signatures or initials.
Ii. Substantive Procedures
These are audit procedures designed to detect material
misstatements at the assertion level.
Substantive procedures comprise: Tests of details (of classes
of transactions, account balances and (i) disclosures), and
Substantive analytical procedures.
(ii) The auditor applies compliance tests when the purpose is to
see whether prescribed accounting control procedures are
being followed. This evaluation identifies the control
procedures that can be relied on in performing restricted
substantive tests. Substantive tests are applied when the
auditor's purpose is to see whether the peso amount of an
account is properly stated. Thus, there is a relationship
between the amount of reliance and the amount of additional
work that will be needed.
Types of substantive tests
There are two general categories of
substantive tests.
(a) Tests of Details of Transactions or
Balances; and
(b) Analytical Review Procedures
Irrespective of the assessed risks of
material misstatement, the auditor shall
design and perform substantive
procedures for each material class of
transactions, account balance and
disclosure.
A.) Tests of Details
This type of substantive test involves obtaining evidential matter
on the items (or details) involved in an account balance or class
of transactions.
Tests of details are also referred to as follows:
Test of transactions
These are tests of the processing of individual transactions by
inspection of the documents and accounting records involved
in processing. For example, tracing a sample of receiving
reports to the purchase journal to see whether receipts of
merchandise have been recorded as purchases.
A.) Tests of Details
Test of balances
These are tests applied directly to the details of balances in general ledger
accounts. For example, confirming the balances of accounts in the accounts payable
subsidiary ledger with individual customers.
These tests have the objective of establishing the monetary correctness of the
accounts they relate to.
Some auditors refer to tests of balances as direct tests of balances to emphasize the
substantive nature of the test as directly supporting an account balance. It should
be noted that substantive tests and compliance tests of control procedures that
leave a documentary trail both involve the inspection of documents supporting the
transactions.
For this reason, these tests are often applied together to the same group of
documents. In that case, the test is referred to as a dual purpose test because it has
both compliance and substantive objectives.
B.) ANALYTICAL review procedures
Analytical types of tests involve study and
comparison of relationships among accounting data
and related information. They identify unusual
fluctuations for investigation and focus on the
rationale of relationship. They are substantive tests
that may achieve specific audit objectives if the
evidential matter is considered persuasive by the
auditor. Auditing standards require the application
of analytical procedures at the planning and overall
final review stages of audits. The auditors may also
decide to use them during the audit as substantive
tests to provide evidence as to the reasonableness
of the specific account balances.
Figure 13-2 presents examples of analytical procedures
that involve comparison.
Audit techniques are the basic tools or
means employed to obtain audit evidences.
The application of these techniques
constitutes the audit procedures.
Deciding the number of items
The auditor must decide the extent of testing or the number
of items to audit. For example, when auditing cash receipts,
an auditor may decide to examine every cash disbursement
or only a sample of them. The sufficiency of the evidence
needed determines the number of items to test.
TIMING OF TESTING
Another decision that the auditor must make is when to perform each
audit procedure. Because an audit usually begins sometime during the
fiscal year being audited and ends one to three months after the end of
the fiscal year, a long period of time for performing the procedure is
available. Audit procedures performed before year-end are referred to
as interim work, whereas those performed between year-end and the
completion of the audit are referred to as year-end work. For example,
confirming accounts receivable one month before year-end is interim
work. Confirming accounts receivable at December 31 for a client with a
December 31 fiscal year-end is year-end work.
TIMING OF TESTING
The auditor should consider the following in
deciding whether and when to perform interim
work in a particular account balance:
(1) the internal control associated with the
account, (2) how rapidly business conditions
might change, (3) management's predisposition to
misstate the financial statements and the
potential impact of such misstatements on the
account, and (4) the predictability of the account
balances at year-end.
TIMING OF TESTS OF CONTROLS
The auditor shall test controls for the particular time, or
throughout the period for which the auditor intends to
rely on those controls in order to provide an
appropriate basis for the auditor's intended reliance.
When the auditor obtains audit evidence about the
operating effectiveness of controls during an interim
period, the auditor shall: (a) obtain audit evidence about
significant changes to those controls subsequent to the
interim period; and (b) determine the additional audit
evidence to be obtained for the remaining period.
TIMING OF TESTS OF CONTROLS
Also, when using audit evidence obtained in previous audits, the auditor
should consider the following: (a) The effectiveness of other elements of
internal control. including the control environment, the entity's monitoring
of controls, and the entity's risk assessment process;
(b) The risks arising from the characteristics of the control, including
whether it is manual or automated:
(c) The effectiveness of general IT control:
(d) The effectiveness of the control and its application by the entity,
including the nature and extent of deviations in the application of the
control noted in previous audits, and whether there have been personnel
changes that significantly affect the application of the control;
(e) Whether the lack of a change in a particular control poses a risk due to
changing circumstances; and
(f) The risks of material misstatement and the extent of reliance on the
control.
When the auditor plans to rely on controls over a risk the auditor has
determined to be a significant risk, the auditor shall test in the current
period.
Timing of substantive ProceDures
Irrespective of the assessed risks of materials misstatement,
the auditor shall design and perform substantive
procedures for each material class of transactions, account
balance, and disclosure.
The auditor's substantive audit procedures shall include
the following audit procedures related to the financial
statement closing process: (a) Agreeing or reconciling the
financial statements with the underlying records: and (b)
Examining material journal entries and other adjustments
made during the course of preparing the financial
statements When the auditor has determined that an
assessed risk of material misstatements at the assertion
level is a significant risk, the auditor shall perform
substantive audit procedures that are specifically
responsive to that risk. When the approach to a significant
risks consists only of substantive procedures, those
procedures shall include tests of details.
Timing of substantive ProceDures
When substantive procedures are performed at an-interim
date, the auditor shall cover the remaining period by
performing: (a) substantive procedures, combined with tests
of controls for the intervening period; or (b) if the auditor
determines that it is sufficient, further substantive
procedures only, that provide a reasonable basis for
extending the audit conclusions from the interim date to the
period end.
If misstatements that the auditor did not expect when
assessing the risks of material misstatement are detected at
an interim date, the auditor shall evaluate whether the
related assessment of risk and the planned nature, timing, or
extent of substantive procedures covering the remaining
period need to be modified.
Selecting The Audit Procedures That
Will Be Applied
After the auditor has developed specific audit objectives in
relation to the assertion for a particular account balance or
class of transactions, the next step is to select audit
procedures to achieve these objectives.
In determining which audit procedures to use to obtain
evidence, the auditor must consider whether one or more
procedures will provide evidence that can reduce the risk of
that assertion being misstated to an acceptable low level. It
is possible that more than one audit procedure may be
required to determine the validity of an assertion. In some
cases however, an audit procedure may provide evidence
about the validity of more than one assertion.
Selecting The Audit Procedures That
Will Be Applied
The selection of particular procedures to achieve specific
audit objectives is influenced by the following
considerations:
1. The nature and materiality of the particular component of
the Financial statements (account balance or class of
transaction).
2. The nature of the audit objective to be achieved.
3. The reliance that can be placed on internal control
structure.
4. The relative risk of material errors or irregularities.
5. The kinds and competence of available evidence.
6. The expected efficiency and effectiveness of possible
audit procedures.
Selecting The Audit Procedures That
Will Be Applied
Auditing standards suggest that the auditor must use
professional judgment in determining the nature,
timing and extent of audit procedures appropriate in
a particular situation. The procedure should satisfy
the auditor's objectives so that the evidence
gathered enables the auditor to verify the assertions
in the financial statements. Thus the combination of
the auditor's reliance on internal control (structure)
and on selected substantive tests should provide a
reasonable basis for his opinion on the financial
statements.
THANK YOU!
References
[Link]
[Link]
Auditing and Assurance Principles by Cabrera
-Chapter 13