1. Give examples of responses to the assessed risk of material misstatement.
2. What is the relationship of a less than high control risk assessment to the nature, extent, and timing of substantive tests?
3. How are audit matters related to internal control communicated to management and to those charged with governance?
4. When is the control risk assessment High? Less than high?
1. Examples of responses to the assessed risk of material misstatement are-
i. Transactions that are recorded based on management‘s intent like- debt refinancing, assets to be sold, and classification of marketable securities.
ii. Pending litigation and contingent liabilities Like- sales warranties, financial guarantees, and environmental remediation)
iii. Use of off-balance sheet finance, investments in entities formed to accomplish specific objectives, and other complex financing arrangements.
2. If the auditor plans to assess less than high control risk by relying on controls, and the nature, timing, and extent of planned substantive procedures are based on that lower assessment, the auditor must obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance. However, the auditor is not required to assess control risk at less than high for all relevant assertions and, for a variety of reasons, the auditor may choose not to do so.
3. Auditors are required by ISA 260 to communicate audit matters of governance interest to those charged with governance. It is important that those charged with governance have an understanding of all significant issues that have arisen from the audit process. This implies that the communication should be with the highest level of management, including the executive and non-executive directors, and the audit committee, where relevant. The identity of the relevant person(s) to whom the communication will be addressed may be clarified in the engagement letter.
4. Control risk assessment is High for relevant assertions, for which controls are necessary to sufficiently address the assessed risk of material misstatement in those assertions are missing or ineffective.
Control risk assessment is less than high for relevant assertions when the auditor has not obtained sufficient appropriate evidence.
Tahnks & all the best.........
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