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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 1.6 Identifying and assessing the risk of material misstatement
As per SA 315 'Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment' , the objective of the auditor is to identify and assess the risks of material misstatement, whethe... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## The objective of the auditor as stated in SA 315 is to identify and assess the risks of material misstatement.
- (i) The auditor shall identify and assess the risks of material misstatement at:
- (a) the financial statement level
- (b) the assertion level for classes of transactions, accoun... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 1.7 Risk Assessment Procedures
You have already gained a little knowledge about risk assessment procedures in Chapter 2.
The audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risks of mater... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## What is included in risk assessment procedures?
The risk assessment procedures shall include the following:
- (a) Inquiries of management and of others within the entity who in the auditor's judgment may have information that is likely to assist in identifying risks of material misstatement due t... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## AUDITING AND ETHICS
obtain information, or a different perspective in identifying risks of material misstatement, through inquiries of others within the entity and other employees with different levels of authority.
- Inquiries directed toward internal audit personnel may provide info... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 1.8 Information obtained by performing risk assessment procedures - Used as audit evidence
Information obtained by performing risk assessment procedures and related activities may be used by the auditor as audit evidence to support assessments of the risks of material misstatement.... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 4
Jo Jo Limited is planning to list on Bombay Stock Exchange next year. As an auditor of Jo Jo Limited, identify any one reason of increased audit risk due to listing of the company next year. | [
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-0.00... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 5
On perusing financial statements of Jo Jo Limited put up for audit, it is observed by the auditor that current ratio has improved from 1.20:1 (in preceding year) to 1.75:1 (in current year). Identify what kind of risk assessment procedures are being performed b... | [
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-0.0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.1 What is meant by materiality?
SA 320 Materiality in Planning and Performing an Audit states that misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users ... | [
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-0.002517321845516562... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.2 Materiality in Planning and performing an auditAuditor's responsibility
The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if ... | [
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0.026709850877523422,... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## AUDITING AND ETHICS
In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material. These judgments provide a basis for:
- (a) Determining the nature, timing and extent of risk assessment procedures;
- (b) Identifying and assessing the risks of... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.3 Determination of materiality- a matter of professional judgment
The auditor's determination of materiality is a matter of professional judgment, and is affected by the auditor's perception of the financial information needs of users of the financial statements. In this context, it is reasonab... | [
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0.025406664237380... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.4 Performance Materiality
Practically, it is difficult for auditors to design tests to identify individual material misstatements. It is likely that misstatements are material in aggregate. It takes us to the concept of 'performance materiality.'
Performance materiality means the amount or amo... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.5 Determining Materiality and Performance Materiality when Planning the Audit
When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole. If, in the specific circumstances of the entity, there is one or more particular cla... | [
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0.02643941342830658,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.6 Use of Benchmarks in Determining Materiality for the Financial Statements as a Whole
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial stateme... | [
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0.006114788819104433,
-0.02... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.6.1 Chosen Benchmark - Relevant financial data
In relation to the chosen benchmark, relevant financial data ordinarily includes: -
- Prior periods' financial results and financial positions,
- The period to-date financial results and financial position, and
- Budgets or forecasts for th... | [
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0.02616022527217865,
0.001349331927485764,
-0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.6.2 Determining a percentage to be applied to a chosen benchmark involves the exercise of professional judgment.
There is a relationship between the percentage and the chosen benchmark, such that a percentage applied to profit before tax from continuing operations will normally be hig... | [
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-0.000538456370122730... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.7 Materiality Level or Levels for Particular Classes of Transactions, Account Balances or Disclosures
Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts ... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.8 Revision in Materiality level as the Audit Progresses
Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) may need to be revised as a result of a change in circumst... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.9 Documenting the Materiality
The audit documentation shall include the following amounts and the factors considered in their determination:
- (a) Materiality for the financial statements as a whole
- (b) If applicable, the materiality level or levels for particular classes of transa... | [
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-0.0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 2.10 Materiality and Audit Risk
The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Materiality and Audit Risk are considered throughout the audit, in particular, when:
- (a) Identifying and assessing the risks of material misstatement;
- (b) Determining the nature, timing and extent of further audit procedures; and
- (c) Evaluating the effect of uncorrected misstatements, if any... | [
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-0.038... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor... | [
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0.03704444319009781,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 6
CA A. Raja is auditor of Build Well Forgings Private Limited having a revenue of ` 25 crore. The company has been sanctioned a term loan of ` 50 lacs from a bank. However, as at end of the year, only ` 1 lac was availed due to delay in procurement of asset. The financial ... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3. UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
SA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment states that the auditor shall obtain an understanding of the following: -
- (a) Relevant industry, regulatory, and... | [
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-0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (b) The nature of the entity, including: -
- (i) its operations;
- (ii) its ownership and governance structures;
- (iii) the types of investments that the entity is making and plans to make, including investments in special-purpose entities; and
- (iv) the way that the entity is structured and how... | [
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0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (c) The entity's selection and application of accounting policies, including the reasons for changes thereto
The auditor shall evaluate whether the entity's accounting policies are appropriate for its business and consistent with the applicable financial reporting framework and a... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (d) The entity's objectives and strategies, and those related business risks that may result in risks of material misstatement.
The entity conducts its business in the context of industry, regulatory and other internal and external factors. To respond to these factors, the entity's management def... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (e) The measurement and review of the entity's financial performance
Management and others will measure and review those things they regard as important. Performance measures, whether external or internal, create pressures on the entity. These pressures, in turn, may motivate management to ... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.1 Why understanding the entity and its environment is significant?
Understanding the entity and the environment in which it operates is very significant. It helps the auditor in planning the audit and in identifying areas requiring special attention. Gaining knowledge abo... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 3.2 Understanding the entity-a continuous process
Obtaining an understanding of the entity and its environment, including the entity's internal control (referred to hereafter as an 'understanding of the entity'), is a continuous, dynamic process of gathering, updating and analy... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 4
The auditor of ABC Textiles Ltd chalks out an audit plan without understanding the entity's business. Since he has carried out many audits of textile companies, there is no need to understand the nature of business of ABC Ltd. Advise the auditor how he should proceed. | [
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0.03392382338643074,
-0.009... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
Obtaining an understanding of the entity and its environment, including the entity's internal control (referred to hereafter as an 'understanding of the entity'), is a continuous, dynamic process of gathering, updating and analysing information throughout the audit. The... | [
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0.005109202582389116,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 5
While auditing the books of accounts of Heavy Material Limited for the financial year 2022-23, a team member of the auditor of Heavy Material Limited showed no inclination towards understanding the business and the business environment of the above mentioned company. Is ... | [
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0.05893635004758835,
-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The approach of team member of the auditor of Heavy Material Limited is incorrect because understanding the business and the business environment of company whose audit is to be conducted is very important, as it helps in planning the audit and identifying areas requiring special attentio... | [
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-0.... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.1 Meaning of Internal Control
As per SA-315, 'Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity and its Environment', the internal control may be defined as 'the process designed, implemented and maintained by those charged with governance, management ... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.2 As derived from above definition, the purpose of Internal Control is as under
Internal control is designed, implemented and maintained to address identified business risks that threaten the achievement of any of the entity's objectives that concern:
- The reliability of the... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.3 Benefits of Understanding of Internal Control
An understanding of internal control assists the auditor in: -
- (i) Identifying types of potential misstatements;
- (ii) Identifying factors that affect the risks of material misstatement, and
- (iii) Designing the nature, timing, and extent of ... | [
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0.007049630396068096,
-0.04... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (i) Internal control can provide only reasonable assurance
Internal control, no matter how effective, can provide an entity with only reasonable assurance about achieving the entity's financial reporting objectives. The likelihood of their achievement is affected by inherent li... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (ii) Human judgment in decision-making
Realities that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human error. For example, there may be an error in the design of, or in the change to, a control. | [
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0.0008483381825499237,... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (iii) Lack of understanding the purpose
Equally, the operation of a control may not be effective, such as where information produced for the purposes of internal control (for example, an exception report) is not effectively used because the individual responsible for reviewing the info... | [
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-0.009720366448163... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (iv) Collusion among People
Additionally, controls can be circumvented by the collusion of two or more people or inappropriate management override of internal control. For example, management may enter into side agreements with customers that alter the terms and conditions of the entity's ... | [
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0.002242867834866047,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (vi) Limitations in case of Small Entities
Smaller entities often have fewer employees due to which segregation of duties is not practicable. However, in a small owner-managed entity, the owner-manager may be able to exercise more effective oversight than in a larger entity. Th... | [
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0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 7
Auditor GR and Associates, appointed for audit of PNG Ltd, a manufacturing company engaged in manufacturing of various food items. While planning an audit, the auditor does not think that it would be necessary to understand internal controls. Advise the auditor in this regard. | [
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0.03213949128985405,
-0.0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The auditor shall obtain an understanding of internal control relevant to the audit. Although most controls relevant to the audit are likely to relate to financial reporting, not all controls that relate to fi nancial reporting are relevant to the audit. It is a matter of the ... | [
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0.04307036101818085,
-0.008682294748723507,... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 8
The team member of the auditor of Simple and Easy Limited was of the view that understanding the internal control of the company would not help them in any manner in relation to audit procedures to be applied while conducting the audit. | [
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-0.0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The view of the team member of the auditor is incorrect because understanding the internal control of the company would help the auditor and his team members in designing the nature, timing and extent of audit procedures to be applied while conducting the audit of the company. | [
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0.025227829813957214,
0.05323443934321403... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.5 Components of Internal Control
The division of internal control into the following five components provides a useful framework for auditors to consider how different aspects of an entity's internal control may affect the audit: -
- (A) The control environment
- (B) The entity's risk ... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.5(A) Control Environment
The auditor shall obtain an understanding of the control environment. As part of obtaining this understanding, the auditor shall evaluate whether:
- (i) Management has created and maintained a culture of honesty and ethical behaviour and
- (ii) The strengths in the c... | [
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0.016987474635243416,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## What is included in Control Environment?
The control environment includes:
- (i) the governance and management functions and
- (ii) the attitudes, awareness, and actions of those charged with governance and management.
- (iii) the control environment sets the tone of an organization, inf... | [
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0.01... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (a) Communication and enforcement of integrity and ethical values
The effectiveness of controls cannot rise above the integrity and ethical values of the people who create, administer, and monitor them. Integrity and ethical behaviour are the product of the entity's ethical and ... | [
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0.0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (c) Participation by those charged with governance
It includes attributes of those charged with governance such as their independence from management, their experience and stature, the extent of their involvement and the information they receive and the scrutiny of activities. | [
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0.014968931674957275,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (d) Management's philosophy and operating style
Management's philosophy and operating style encompass a broad range of characteristics. For example, management's attitudes and actions towards financial reporting- what approach is taken by management in selecting accounting policie... | [
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0.... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (e) Organisational structure
The framework within which an entity's activities for achieving its objectives are planned, executed, controlled, and reviewed. Establishing a relevant organisational structure includes considering key areas of authority and responsibility and appropria... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (g) Human resource policies and practices
Policies and practices that relate to, for example, recruitment, orientation, training, evaluation, counselling, promotion, compensation, and remedial actions. Human resource policies and practices often demonstrate important matters in rela... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Existence of a satisfactory control environment-not an absolute deterrent to fraud
The existence of a satisfactory control environment can be a positive factor when the auditor assesses the risks of material misstatement. However, although it may help reduce the risk of fraud, a satisfactory... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.5(B) The Entity's Risk Assessment Process
The auditor shall obtain an understanding of whether the entity has a process for:
- (a) Identifying business risks relevant to financial reporting objectives
- (b) Estimating the significance of the risks
- (c) Assessing the likelihood of their occurre... | [
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-0.006484689190983772,
-0.01245246920734644,
-0.0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.5(C) The information system, including the related business processes, relevant to financial reporting and communication
The auditor shall obtain an understanding of the information system, including the related business processes, relevant to financial reporting, including the following ar... | [
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0.013343247584998608,
-0.... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (f) Controls surrounding journal entries.
An information system consists of infrastructure (physical and hardware components), software, people, procedures, and data. Many information systems make extensive use of information technology (IT). Information system should provide qualitative ... | [
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0.013448948040604591,
-0.00... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.5(D) Control Activities
The auditor shall obtain an understanding of control activities relevant to the audit, which the auditor considers necessary to assess the risks of material misstatement. An audit requires an understanding of only those control activities related to significant... | [
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0.029200531542301178,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.5(E) Monitoring of Controls
The auditor shall obtain an understanding of the major activities that the entity uses to monitor internal control over financial reporting.
Monitoring of controls is a process to assess the effectiveness of internal control performance over time. It helps in a... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 7
CA Smriti is auditor of a company. As part of audit, she is going through company policies and practices regarding employee recruitment, training, orientation and related matters. She seems to be very much interested in finding out whether company hires... | [
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0.02112758904695511,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Test Your Understanding 8
During the audit of same company, CA Smriti is keen to find out whether there exists a proper system of segregation of duties in the company. She wants to be sure that a person responsible for recording a transaction is different from the person authorising it... | [
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-0.... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.6 Are all Controls Relevant to the audit?
There is a direct relationship between an entity's objectives and the control it implements to provide reasonable assurance about their achievement. The entity's objectives, and therefore controls, relate to financial reporting, opera... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.7 Controls over the completeness and accuracy of information
Controls over the completeness and accuracy of information produced by the entity may be relevant to the audit if the auditor intends to make use of the information in designing and performing further procedures. For example, in audit... | [
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0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.8 Internal control over safeguarding of assets
Internal control over safeguarding of assets against unauthorised acquisition, use, or disposition may include controls relating to both financial reporting and operations objectives. The auditor's consideration of such controls is... | [
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0.039494507014751434,
-0.0013104957761242986,... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.9 Controls relating to objectives that are not relevant to an audit
An entity generally has controls relating to objectives that are not relevant to an audit and therefore need not be considered. For example, an entity may rely on a sophisticated system of automated controls to provide ef... | [
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-0.013787010684609413,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 4.10 Nature and Extent of the Understanding of Relevant Controls
Evaluating the design of a control involves considering whether the control, individually or in combination with other controls, is capable of effectively preventing, or detecting and correcting, material misstate... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5. RISKS THAT REQUIRE SPECIAL AUDIT CONSIDERATION
As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the auditor's judgment, a significant risk. In exercising judgment as to which risks are significant risks, the auditor shall consider at least ... | [
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... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.1 Identifying Significant Risks
Significant risks often relate to significant non-routine transactions or judgmental matters. Non-routine transactions are transactions that are unusual, due to either size or nature, and that therefore occur infrequently. Judgmental matters may include... | [
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-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.2 Risks of Material Misstatement -Greater for Significant Non-Routine Transactions
Risks of material misstatement may be greater for significant non-routine transactions arising from matters such as the following:
- Greater management intervention to specify the accounting treatment.
-... | [
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-0.... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 5.3 Risks of material misstatement- Greater for Significant Judgmental Matters
Risks of material misstatement may be greater for significant judgmental matters that require the development of accounting estimates, arising from matters such as the following:
- Accounting principles for accounti... | [
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0.0221356600522995,
-0.0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 6. EVALUATION OF INTERNAL CONTROL SYSTEM
So far as the auditor is concerned, the examination and evaluation of the internal control system is an indispensable part of the overall audit programme. The auditor needs reasonable assurance that the accounting system is adequate and that all the account... | [
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0.012926421128213406,
-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 6.1 Benefits of Evaluation of Internal Control to the Auditor
The review of internal controls will enable the auditor to know:
- (i) whether errors and frauds are likely to be located in the ordinary course of operations of the business
- (ii) whether an adequate internal control sys... | [
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-0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## AUDITING AND ETHICS
- (viii) the extent and the depth of the examination that he needs to carry out in the different areas of accounting
- (ix) what would be appropriate audit technique and the audit procedure in the given circumstances
- (x) what are the areas where control is weak and where it ... | [
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0.025492670014500618,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Formulate Audit Program after understanding Internal Control
The auditor can formulate his entire audit programme only after he has had a satisfactory understanding of the internal control systems and their actual operation. If he does not care to study this aspect, it is ver... | [
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0.025767609477043152,
0.033117301762104034,
0.03592674434185028,... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 6.2 Evaluation of Internal Control- Methods
A review of the internal control can be done by a process of study, examination and evaluation of the control system installed by the management. The first step involves determination of the control and procedures laid down by the management.... | [
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0.05736379325389862,
0.015446462668478489,
-0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 6.2(A) The Narrative Record
This is a complete and exhaustive description of the system as found in operation by the auditor. Actual testing and observation are necessary before such a record can be developed. It may be recommended in cases where no formal control system is in operation and would ... | [
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0.01750524528324604,
-0.000... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 6.2(B) Check List
This is a series of instructions and/or questions which a member of the auditing staff must follow and/or answer. When he completes instruction, he initials the space against the instruction. Answers to the check list instructions are usually Yes, No or Not Applicable. This ... | [
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0.011274592950940132,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Example
A few examples of check list instructions are given hereunder:
1. Are tenders called before placing orders?
2. Are the purchases made on the basis of a written order?
3. Is the purchase order form standardised?
4. Are purchase order forms pre-numbered?
5. Are the inventory control account... | [
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-0.000... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 6.2(C) Internal Control Questionnaire
This is a comprehensive series of questions concerning internal control. This is the most widely used form for collecting information about the existence, operation and efficiency of internal control in an organisation. An important advantage of the questionna... | [
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## A. Purchases
- (1) Are purchases centralised in the Purchase Department?
- (2) (a) Are purchases made only from approved suppliers?
3. (b) Is a list of approved suppliers maintained for this purpose?
4. (c) Does the master list contain more than one source of supply for all important m... | [
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0.047361500561237335,
0.029995519667863846,
0.... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## B. Creditors
- (1) (a) Are suppliers' invoices routed direct to the Accounts Department?
2. (b) Are they entered in a Bill register before submitting them to other departments for check and/or approval?
3. (c) Are advance and partial payments entered on the invoices before they are subm... | [
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-0.008910... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## C. Inventories
- (1) Are stocks stored in assigned areas?
- (2) Are stocks insured comprehensively against different risks? If some risk is not insured, whether it is due to specific decision taken by a senior official?
- (3) Is a record maintained for the insurance policies?
- (4) Is the record r... | [
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0.009... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 6.2(D) Flow Chart
It is a graphic presentation of each part of the company's system of internal control. A flow chart is considered to be the most concise way of recording the auditor's review of the system. It minimises the amount of narrative explanation and thereby achieves a consideration or p... | [
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-0.0199... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 11
In order to evaluate the Internal Control of Your and My Limited, a team member of the auditors used a method according to which, number of questions relating to internal control of the company were required to be answered by the employees of the company. After obtainin... | [
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-0.027647478505969048,
-0.024376891553401947,
-0.01738063618540764,
-0.03470814228057861,
-0.01928599737584591,
-0.014600859023630619,
0.040133100003004074,
0.023616012185811996,
0.03829250857234001,
0.016558216884732246,
-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The method of evaluation of internal control used in the above question is known as Internal Control Questionnaire because in questionnaire method, a number of questions relating to internal control of a company are required to be answered by employees of that company and when answers to ... | [
0.008341552689671516,
-0.018743883818387985,
-0.018022967502474785,
-0.013567471876740456,
-0.05028421804308891,
-0.013012665323913097,
-0.024542197585105896,
-0.006578278727829456,
-0.01812322996556759,
0.02162867598235607,
-0.00008228040678659454,
0.027553096413612366,
-0.01794765330851078... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 12
Healthy and Useful Limited is into small manufacturing as well as trading business. For the purpose of evaluating the internal control of Healthy and Useful Limited, a team member of the auditors of the company used a method according to which the whole description of internal cont... | [
-0.010012765415012836,
-0.011823502369225025,
0.021772677078843117,
-0.007065667305141687,
-0.06022327020764351,
-0.013603302650153637,
-0.016632473096251488,
0.004224278964102268,
-0.009771754033863544,
0.042745642364025116,
0.03261185437440872,
0.04457420855760574,
0.018162479624152184,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## SOLUTION
The method of evaluation of internal control referred above is known as Narrative Record because in Narrative Record method, a whole description of internal control operating in an entity is recorded. Narrative Record method is also appropriate for small manufacturing as well as trading b... | [
0.006990975234657526,
-0.024130724370479584,
0.006775486283004284,
-0.009622978046536446,
-0.03824944049119949,
-0.03646247088909149,
-0.0410894900560379,
-0.0010528564453125,
-0.00735904136672616,
0.04053054004907608,
0.009364880621433258,
0.014514530077576637,
-0.03167348727583885,
-0.01... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 7. TESTING OF INTERNAL CONTROL
After assimilating the internal control system, the auditor needs to examine whether and how far the same is actually in operation. For this, he resorts to actual testing of the system in operation. This he does on a selective basis: he can plan this testin... | [
-0.012716964818537235,
0.0008905818685889244,
0.023891106247901917,
-0.010748702101409435,
-0.03226712718605995,
-0.027437377721071243,
-0.02404671162366867,
-0.020891034975647926,
-0.00043068983359262347,
0.06502032279968262,
0.022404087707400322,
0.04078669100999832,
0.011816651560366154,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 8. WHAT IS AN AUTOMATED ENVIRONMENT?
An automated environment basically refers to a business environment where the processes, operations, accounting and even decisions are carried out by using computer systems - also known as Information Systems (IS) or Information Technology (... | [
-0.0017419542418792844,
0.004529248923063278,
-0.035136014223098755,
0.024786414578557014,
-0.01601085066795349,
0.004237145651131868,
-0.018050314858555794,
-0.004794251639395952,
-0.020989403128623962,
0.05104421079158783,
0.005238884594291449,
0.0544142946600914,
-0.012879032641649246,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 8.1 Key features of an automated environment
The fundamental principle of an automated environment is the ability to carry out business with less manual intervention and more system driven. The complexity of a business environment depends on the level of automation i.e., if a business... | [
0.011416757479310036,
0.01332214754074812,
-0.018554292619228363,
-0.005054123234003782,
-0.000793920480646193,
0.030329221859574318,
-0.02113138698041439,
-0.022698920220136642,
-0.02436317689716816,
0.07437676936388016,
-0.024952605366706848,
0.04709235206246376,
-0.009697330184280872,
-... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 8.2 Understanding and documenting automated environment
In an audit of financial statements, an auditor is required to understand the entity and its business, including IT. Understanding the entity and its automated environment involves understanding how IT department is organised, IT a... | [
-0.006151141598820686,
0.0036818343214690685,
-0.016296716406941414,
-0.008761788718402386,
0.012743775732815266,
0.006315641570836306,
-0.012869711965322495,
-0.016241297125816345,
-0.02246616967022419,
0.058918546885252,
-0.0059425728395581245,
0.059543345123529434,
0.01768605224788189,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 8.3 Risks arising from use of IT Systems
Having obtained an understanding of the IT systems and the automated environment of a company, the auditor should now understand the risks that arise from the use of IT systems. Given below are some such risks that should be considered:
- Inaccurate proc... | [
-0.039093978703022,
-0.008640693500638008,
-0.003035352798178792,
-0.017845267429947853,
0.0008490761392749846,
-0.009476494044065475,
-0.033292677253484726,
-0.025889670476317406,
0.01790136843919754,
0.08095107227563858,
-0.0028218289371579885,
0.03222835808992386,
0.015272007323801517,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## Impact on substantive checking
Inability to address above discussed risks may lead to non-reliance of data obtained from systems. In such a case, all information, data, and reports would have to be tested thoroughly for their completeness and accuracy. It could lead to increased substantive checki... | [
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-0.01942775584757328,
0.03132636845111847,
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0.0029422666411846876,
-0.018020065501332283,
-0.0037271478213369846,
0.08032184094190598,
0.004818557295948267,
0.000405701226554811,
0.0030914279632270336,... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## 8.5(A) General IT controls
General IT controls are policies and procedures that relate to many applications and support the effective functioning of application controls. General IT-controls that maintain the integrity of information and security of data commonly include controls over the followin... | [
-0.012081611901521683,
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0.014971488155424595,
-0.0005777124315500259,
-0.003760338295251131,
-0.03264670446515083,
0.014317330904304981,
-0.05033416301012039,
0.023264357820153236,
0.042405735701322556,
-0.030124863609671593,
0.027346257120370865,
0.006454918533563614,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (a) Controls over Data centre and network operations
The objective of controls over Data centre and network operations is to ensure that production systems are processed to meet financial reporting objectives. These include activities such as overall management of computer operati... | [
-0.02218647114932537,
-0.013831873424351215,
-0.010311427526175976,
0.04040638729929924,
0.0015171993291005492,
-0.03348178789019585,
-0.012198160402476788,
-0.017489228397607803,
0.010534174740314484,
0.04546494036912918,
-0.019304171204566956,
0.052787184715270996,
0.025522585958242416,
... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (b) Program Change
The objective of program change controls is to ensure that modified systems continue to meet financial reporting objectives. It includes activities such as change management process, recording, managing and tracking change requests, making and testing changes etc. | [
-0.010114076547324657,
-0.01187894120812416,
0.023791169747710228,
0.010178687982261181,
-0.00894169881939888,
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0.011750081554055214,
0.036009278148412704,
0.038342759013175964,
0.02103474549949169,
-0... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (c) Access Security
The objective of controls over access security is to ensure that access to programs and data is authenticated and authorized to meet financial reporting objectives. It includes activities such as security organization & management, security policies & procedures, appli... | [
-0.014350846409797668,
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0.049295466393232346,
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0.001728822011500597,
-0.016870100051164627,
0.019994625821709633,
-0.0017500522080808878,
0.06600508093833923,
0.004143788479268551... |
Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf | Audit | Study_Material | N/A | [Concept: Theory]
## (d) Application system acquisition, development, and maintenance
The objective of such controls is to ensure that systems are developed, configured and implemented to meet financial reporting objectives. It includes overall management of development activities, project initiation, a... | [
0.0062164682894945145,
-0.01021454855799675,
0.023349415510892868,
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0.019560251384973526,
0.01637345552444458,
0.029422707855701447,
0.027848394587635994,
0.006228058133274317,
0... |
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