Bangladesh Standard on Auditing- 315 Identifying and Assessing the Risk of Material Misstatement...
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Transcript of Bangladesh Standard on Auditing- 315 Identifying and Assessing the Risk of Material Misstatement...
Bangladesh Standard on Auditing- 315
Identifying and Assessing the Risk of Material Misstatement
through Understanding the Entity and Its Environment
1
Scope of this BSA and ObjectiveIt deals with the auditors responsibilities-•To identify and assess the risk of material
misstatements Through •Understanding the entity •Its environment and •Entity’s internal control systems
Above scope helps the auditor by providing a basis for designing and implementing response to the
assessed risk of material misstatements.
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Risk Assessment Procedures and Related Activities
Inquiries with Management
(A6)
Analytical Procedur
e (A7)
Observation and Inspection (A11)
It includes the following
3
Risk Assessment Procedures and Related Activities- Con---dHere Auditor shall also consider-
•The information gathered at the time of client acceptance or continuance process
•The information gathered by virtue of other engagement activities (Say Tax services) of the same entity
•Changes happened from previous audit if it is recurring audit
•Discussion among the engagement team (A14)
4
What is Risk Assessment Procedures:
The procedure performed to obtain an understanding of the entity and its environment, including the entity’s
internal control systems
To identify and assess the risks of material misstatements whether due to fraud or
error
At Financial Statements levels and Assertion levels
5
Understanding of the Entity
The Entity and its EnvironmentFollowing understanding shall require:a) Relevant industry, regulatory and other
external factors including applicable financial reporting framework
b) The nature of the entity where includes- Its operation Ownership and governance structure Type of investments Its structure and financing mode
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Understanding of the Entity Con----d
The Entity and its Environment
c) Adopted accounting policies of entity (A28)
d) Entity’s objectives and strategies, mission, vision and goal etc. (A29 to A35)
e) Measurement and review of financial performance (A38 )
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The Entity and Its Environments a) Industry, Regulatory and other External
Factors:
Industry Factors Include: Industry condition i.e competitive
environments, demand, supply, price, capacity etc
Suppliers and customer relationships Technological developments Cyclical or seasonal activities Energy supply and cost
8
The Entity and Its Environments Con----dRegulatory Factors include: Regulatory environments Applicable financial reporting
framework Legal and political environments Accounting principles and industry
specific practices Taxation Govt. policies (monetary, fiscal, financial
incentives, tariff restrictions etc) Environmental requirements
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The Entity and Its Environments Con----dOther External Factors include:
General economic conditionInterest rateAvailability of financing Inflationary trendsCurrency devaluation and Any other factor seems relevant to the
auditor.
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The Entity and Its Environments Con----db) Nature of the Entity (A23): Here need to consider-Nature of revenue source, product or service
and market and involvement of technologyConduct of operation Alliance, joint venture, and outsourcing
activitiesGeographic dispersion and segmentationLocation of production facilities, warehouse,
officeKey customers, suppliers Employment arrangementsR&D activities Related party transactions
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The Entity and Its Environments Con----db) Nature of the Entity (A23): Investment and investment activitiesFinancing and financing related activitiesFinancial reporting such as-
Accounting principles and industry practiceRevenue recognition practicesAccounting of fair valueForeign currency assets, liabilities and
transactionsAccounting for unusual and complex
transactions
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Understanding of the Entity Con----d
Understanding the Entity’s Internal Control Systems
Components of Internal Control Systems:
1. Control environment2. The entity’s risk assessment process3. Control activities relevant to the audit4. Information and communications and 5. Monitoring of controls
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Understanding the Entity’s Internal Control Systems
What is ICS?ICS is a set of interrelated activities which
consists of policies and procedures to provide management with reasonable assurance that the company achieve its objectives and goals. These policies and procedures are often called controls and collectively they comprise the entity’s internal control
Auditor must obtain an understanding of internal control systems and gathered related evidence to support that assessment.
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Understanding the Entity’s Internal Control Systems Con---d
Purpose of Internal Control (A44):
It is designed, implemented and maintained to address identified business risks that threaten the achievement of the following concern:1. reliability of entity’s financial statements2. effectiveness and efficiency of business operation and 3. compliance with the applicable laws and regulations.
15
Understanding the Entity’s Internal Control Systems Con---d
Limitation of Internal Control (A46):
1. Inherent limitation for weak designing and implementing
2. Management override control by collusion
3. Lack of understanding and commitment
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Understanding the Entity’s Internal Control Systems Con---d
Auditor’s Concern
1. Control related to the reliability of Financial Statements
2. Controls over Classes of Transactions
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Understanding the Entity’s Internal Control Systems Con---d
Components of Internal Control (Appendix-1, Text Chp-10):
1. Control Environment-Where includes Communication and enforcement of
integrity and ethical values Commitment to competence Participation by those charged with
governance Mgt philosophy and operating style Organizational structure Assignment of authority and responsibility Human resource policies and practices
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Understanding the Entity’s Internal Control Systems Con---d
Components of Internal Control2. Entity’s Risk Assessment Process: Risk can arise or change due to following
circumstances: Changes in operating environments New personnel New or revamped information systems Rapid growth and new technology New business model, product or activities Human resource policies and practices Corporate restructuring and expanding New accounting pronouncements.
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Understanding the Entity’s Internal Control Systems Con---d
Components of Internal Control3. Information systems including the
related business process, relevant to financial reporting and communication
The auditor determines-a. Major class of transactionsb. Initiation of transactionc. Accounting record exist d. Transaction passes from initiation to completione. The nature and detail of financial reporting It to be documented by1. Narrative or 2. Flow chart by Walkthrough test
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Understanding the Entity’s Internal Control Systems Con---d
Components of Internal Control4. Control Activities: It is pertinent toa) Adequate separation of duties: Here includes- Separation of custody of assets from
accounting Separation of authorization from custody
of assets Separation of operational responsibilities
from record keeping responsibilities Separation of IT duties from key users
outside IT
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Understanding the Entity’s Internal Control Systems Con---d
Components of Internal Control4. Control Activities: It is pertinent to
b. Proper authorization of transaction and dutiesc. Adequate documents and records: It should be:
• Pre numbered• Timely preparation• Understandable• Designed for multiple use• Simple in form
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Understanding the Entity’s Internal Control Systems Con---d
Components of Internal Control4. Control Activities: It is pertinent to
d. Physical control over assets and records and
e. Independent check on performance
23
Understanding the Entity’s Internal Control Systems Con---d
Components of Internal Control
5. Monitoring of Controls
May consider internal audit functions
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Identifying and Assessing the Risks of Material Misstatements
The above function shall be done-1. At the financial statement level as well
as
2. At the assertion level for classes of transactions, account balances and disclosures
It will provide a basis for designing and performing audit procedures
25
Assessment of Risks of Materials Misstatements at the Financial Statements level (A105 to A108)
It refers to risks that relate pervasively to the financial statements as a whole and potentially affect many assertions.
Actually this type of risk is highly related with fraud, mgt integrity, reliability etc.
Example- Mgt’s lack of competency may have a more pervasive effect on the financial statements
26
Assessment of Risks of Materials Misstatements at the Assertion level
Here Auditor uses the Management’s assertions regarding classes of transaction, account balances and disclosures.
What is assertion: Assertion means representation of
management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. (also see Page-115, chp-6, Leobbecke)
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Assessment of Risks of Materials Misstatements at the Assertion levelAssertion about Classes of Transactions
(A111)OccurrenceCompletenessAccuracyCutoffClassificationAssertion about Account Balances at Period
end (A111)ExistenceRight and obligationsCompletenessValuation and allocation
28
Assessment of Risks of Materials Misstatements at the Assertion levelAssertion about Presentation and Disclosures
(A111)OccurrenceCompletenessClassification and understandabilityAccuracy and valuation
29
Process of Identifying Risks of Materials Misstatements
Appendix-2
Appendix- 2 provides examples of conditions and events that may indicate
the existence of risk of material misstatements
The risk assessment determines the nature, timing and extent of further audit procedure to be performed.
30
Process of Identifying Risks of Materials Misstatements
Appendix-2Operations in region that are economically
unstableOperation exposed to volatile marketsGoing concern and liquidity issueLoss of significant customerConstraints on the availability of capital and
creditChanges in the industryChanges in the supply chainNew product or marketExpanding into new locationChanges in the entity as acquisition, merger
etcSegment likely to be sold.
31
Appendix-2Existence of complex alliance and joint ventureUse of off balance sheet item and SPUSignificant transaction with related partiesLack of appropriate personnel in required
positionChanges of key personnelDeficiency of internal controlInconsistency in strategyChanges of IT environmentSignificant non routine transactionsApplication of new accounting
pronouncementsAccounting measurement that involves
complex processInvolve accounting estimates, litigation, claim
etc
32
Identifying and Assessing the Risks of Material Misstatements Con---d
The whole process is as follows:
Identify risks by
the process as discussed
Assess and
evaluate the
identified risks
Relate the risks with assertions
Consider the likelihood of
misstatemen
ts
33
Special Consideration to Assess Significant Risks (A119 to A126):Whether the risk 1. is a risk of fraud2. related to the recent significant
economic, accounting and other developments
3. arise from the complexity of transactions4. arise from related party transactions5. arise for high degree of subjectivity and
judgments6. involves unusual transactionsFor significant risk auditor shall obtain understanding of
the ICS of the entity including control activities relevant to that risk
34
Revision of Risk AssessmentAuditor’s risk assessment may change
during the course of audit for obtaining additional audit evidence.
What shall auditor do- Shall revise the assessment and Modify further planned audit procedures
35
DocumentationAudit documentation shall include:
a. The discussion among the engagement team
b. Key elements of understanding obtained from environment analysis and internal control systems
c. Identified and assessed risk of material misstatements
d. The risk identified and related control regarding significant risks
36
Thanks every one.
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