ASA 315 - Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement - April 2006
127In addition, ASA 330 describes the consequences for further audit procedures of identifying a risk as significant.
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127 In addition, ASA 330 describes the consequences for further audit procedures of identifying a risk as significant.
128 The determination of significant risks, which arise on most audits, is a matter for the auditor’s professional judgement. In exercising this judgement, the auditor excludes the effect of identified controls related to the risk to determine whether the nature of the risk, the likely magnitude of the potential misstatement including the possibility that the risk may give rise to multiple misstatements, and the likelihood of the risk occurring are such that they require special audit consideration. Routine, non-complex transactions that are subject to systematic processing are less likely to give rise to significant risks because they have lower inherent risks. On the other hand, significant risks are often derived from business risks that may result in a material misstatement. In considering the nature of the risks, the auditor ordinarily considers a number of matters, including the following:
Whether the risk is a risk of fraud.
Whether the risk is related to recent significant economic, accounting or other developments and, therefore, warrants specific attention.
The complexity of transactions.
Whether the risk involves significant transactions with related parties.
The degree of subjectivity in the measurement of financial information related to the risk especially those involving a wide range of measurement uncertainty.
Whether the risk involves significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual.
129 Significant risks often relate to significant non-routine transactions and judgemental matters. Non-routine transactions are transactions that are unusual, either due to size or nature, and that therefore occur infrequently. Judgemental matters may include the development of accounting estimates for which there is significant measurement uncertainty.
130 Risks of material misstatement may be greater for risks relating to significant non-routine transactions arising from matters such as the following:
Greater management intervention to specify the accounting treatment.
Greater manual intervention for data collection and processing.
Complex calculations or accounting principles.
The nature of non-routine transactions, which may make it difficult for the entity to implement effective controls over the risks.
131 Risks of material misstatement may be greater for risks relating to significant judgemental matters that require the development of accounting estimates, arising from matters such as the following:
Section 127 - ASA 315 - Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement - April 2006 - In addition, ASA 330 describes the consequences for further audit procedures of identifying a risk as significant. | Zoe
Accounting principles for accounting estimates or revenue recognition may be subject to differing interpretation.
Required judgement may be subjective, complex or require assumptions about the effects of future events, for example, judgement about fair value.
132 For significant risks, to the extent the auditor has not already done so, the auditor shall evaluate the design of the entity’s related controls, including relevant control activities, and determine whether they have been implemented.
133 Under paragraph 135 of this Auditing Standard, the auditor needs to have an understanding of the entity’s controls related to significant risks to provide adequate information to develop an effective audit approach. Those charged with governance and management ought to be aware of significant risks; however, risks relating to significant non-routine or judgemental matters are often less likely to be subject to routine controls. Therefore, the auditor’s understanding of whether the entity has designed and implemented controls for such significant risks ordinarily includes whether and how management responds to the risks and whether control activities such as a review of assumptions by senior management or experts, formal processes for estimations or approval by those charged with governance have been implemented to address the risks. For example, where there are one-off events such as the receipt of notice of a significant lawsuit, consideration of the entity’s response will include such matters as whether it has been referred to appropriate experts (such as internal or external legal counsel), whether an assessment has been made of the potential effect, and how it is proposed that the circumstances are to be disclosed in the financial report.
134 If management has not appropriately responded by implementing controls over significant risks and if, as a result, the auditor judges that there is a material weakness in the entity’s internal control, under paragraph 141 of this Auditing Standard, the auditor needs to communicate this matter to those charged with governance. In these circumstances, under paragraph 132 of this Auditing Standard, the auditor needs to consider the implications for the auditor’s risk assessment.
Risks for which Substantive Procedures a Risks for which Substantive Procedures alone do not provide Sufficient Appropriate Audit Evidence
Risks for which Substantive Procedures alone do not provide Sufficient Appropriate Audit Evidence
135 As part of the risk assessment as described in paragraph 117, the auditor shall evaluate the design and determine the implementation of the entity’s controls, including relevant control activities, over those risks for which, in the auditor’s judgement, it is not possible or practicable to reduce the risks of material misstatement at the assertion level to an acceptably low level with audit evidence obtained only from substantive procedures.