Section Identifying and Assessing the Risks of M - Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures - Identifying and Assessing the Risks of Material Misstatement

Identifying and Assessing the Risks of MIdentifying and Assessing the Risks of Material Misstatement

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In identifying and assessing the risks of material misstatement relating to an accounting estimate and related disclosures at the assertion level, including separately assessing inherent risk and control risk at the assertion level, as required by ASA 315,[10] the auditor shall take the following into account in identifying the risks of material misstatement and in assessing inherent risk: (Ref: Para. A64–A71)
1. The degree to which the accounting estimate is subject to estimation uncertainty; and (Ref: Para. A72–A75)
2. The degree to which the following are affected by complexity, subjectivity, or other inherent risk factors: (Ref: Para. A76–A79)
  1. The selection and application of the method, assumptions and data in making the accounting estimate; or
  2. The selection of management’s point estimate and related disclosures for inclusion in the financial report.
The auditor shall determine whether any of the risks of material misstatement identified and assessed in accordance with paragraph 16 are, in the auditor’s judgement, a significant risk.[11] If the auditor has determined that a significant risk exists, the auditor shall identify controls that address that risk,[12] and evaluate whether such controls have been designed effectively, and determine whether they have been implemented.[13] (Ref: Para. A80)