Assessing the risks

Assessing the risks

4.1 Assess the risks of material misstatement

Ø  ISA 315 requires auditor to identify and assess the RMM:

①     At the FS level.

②     At the assertion level for classes of transactions, account balances and disclosures.

Ø  Assertions are:

ü  Representations by management, explicit or otherwise.

ü  Embodied in the FS.

ü  Used by the auditors to consider the different types of potential misstatements that may occur.

4.1.1 Four steps to assess the risks of material misstatement

(1)Identify risks throughout the process of obtaining an understanding of the entity and its environment.

(2)Assess the identified risks and evaluate whether they relate more pervasively to the FS as a whole.

(3) Relate the risks to what can go wrong at the assertion level.

(4) Consider the likelihood of the risks causing a material misstatement.

4.2 Significant risk

Ø  As part of risk assessment described, the auditor shall determine whether any of the risks are significant risks, which:

ü  Require special audit consideration.

ü  Are complex or unusual transactions that may indicate fraud.

ü  Other special risks.

4.2.1 Indicators of significant risks

(1) Risk of fraud.

(2) The degree of subjectivity/management judgement in the financial information.

(3) It is an unusual transaction.

(4) It is a significant transaction with a related party.

(5) The complexity of the transaction.