Relationship of External Confirmation PrRelationship of External Confirmation Procedures to the Auditor’s Assessments of the Risks of Material Misstatement

Relationship of External Confirmation Procedures to the Auditor’s Assessments of the Risks of Material Misstatement

10 ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, discusses the auditor’s responsibility to obtain an understanding of the entity and its environment including its internal control, and to assess the risks of material misstatement. It outlines the audit procedures performed to assess the risks of material misstatement of the financial report sufficient to design and perform further audit procedures.

11 ASA 330 The Auditor’s Procedures In Response to Assessed Risks, discusses the auditor’s responsibility to determine overall responses and to design and perform further audit procedures whose nature, timing and extent are responsive to the assessed risks of material misstatement at the financial report and assertion levels. In particular, ASA 330 indicates that the auditor determines the nature and extent of audit evidence to be obtained from the performance of substantive audit procedures in response to the related assessment of the risk of material misstatement and that, irrespective of the assessed risk of material misstatement, the auditor designs and performs substantive audit procedures for each material class of transactions, account balance and disclosure. These substantive audit procedures may include the use of external confirmations for certain assertions.

12 ASA 330 indicates that the higher the auditor’s assessment of risk, the more reliable and relevant is the audit evidence sought by the auditor from substantive audit procedures. Consequently, as the assessed risk of material misstatement increases, ordinarily, the auditor designs substantive audit procedures to obtain more reliable and relevant audit evidence, or more persuasive audit evidence, at the assertion level. In these situations, the use of confirmation procedures may be effective in providing sufficient appropriate audit evidence.

13 The lower the assessed risk of material misstatement, the less assurance the auditor ordinarily needs from substantive audit procedures to form a conclusion about an assertion. For example, an entity may have a loan that it is repaying according to an agreed schedule, the terms of which the auditor has confirmed in previous years. If the other work carried out by the auditor (including such tests of controls as are necessary) indicates that the terms of the loan have not changed and has led to the risk of material misstatement over the balance of the loan outstanding being assessed as low, the auditor might limit substantive audit procedures to testing details of the payments made, rather than again confirming the balance directly with the lender.

14 When the auditor has identified a risk as being significant, see ASA 315, the auditor may give particular consideration to whether confirmations of certain matters may be an appropriate way of reducing the risk of misstatement. For example, unusual or complex transactions may be associated with higher assessed risk than simple transactions. If the entity has entered into an unusual or complex transaction that results in a higher assessed risk of material misstatement, the auditor ordinarily considers confirming the terms of the transaction with the other parties in addition to examining documentation held by the entity.