Audit risk and its structure

Audit risk is the risk of the auditor expressing an erroneous opinion in the event that the financial (accounting) statements contain material misstatements.

Audit risk structure:

1. The risk of non-detection (RN) – the risk that the auditor will not detect a misstatement made in the financial (accounting) statements.

2. The risk of material misstatement of reporting (RSMI) – the risk that a material misstatement was made in the b / o before the start of the audit.

· Inherent risk – the exposure of the assertions of financial (accounting) reporting to potential misstatement, which could be material individually or in combination with other misstatements, assuming the absence of necessary internal controls.

· Control risk is the risk that a misstatement of the financial (accounting) reporting assertion, which may be material individually or in combination with other misstatements, will not be timely prevented or detected and eliminated by the audited entity’s internal control system.

Audit risk formula: AR = RSIO * RN RSIO = NR * RSK

Risk assessment in the audit can be: quantitative, qualitative.

The need for risk assessment in an audit

A proper risk perception is essential for planning an audit. The auditor should use his or her professional judgment to assess audit risk and design the audit procedures necessary to reduce audit risk to an acceptably low level.

Audit risk must be determined in order to determine the scope of the audit (audit procedures), as well as to faithfully reflect reality.

If, as a result of the assessment, the audit risk is determined to be high, i.e. its components are unfavorable, it is necessary to lower the materiality level and check more documents and transactions.

Factors affecting the degree of risk.

the level of competence of the auditor;

the financial condition of the auditor;

the degree of trust of external users to the b / o of the audited entity;

scale of the business of the audited entity; its organizational and legal form;

form of ownership and its distribution in the authorized capital of the audited entity;

the nature and amount of liabilities of the audited entity;

the level of internal control of the audited entity;

the probability of bankruptcy of the audited entity, etc.

Materiality in audit

• FSAD No. 4 “Materiality in audit”

Information about individual assets, liabilities, income, expenses and business transactions, as well as components of capital, is considered material if its omission or misrepresentation could affect the economic decisions of users made on the basis of b / o.

The materiality of information is its property, which makes it capable of influencing the economic decisions of a reasonable user of such information.

Sides of materiality:

Quantitative – means the auditor’s duty to assess whether individually and (or) in total the detected deviations (taking into account the predicted value of unmarked deviations) exceed the level established during planning.

Qualitative – means the obligation of the auditor to use his professional judgment in order to determine whether the deviations in transactions performed by the economic entity from the requirements of the regulatory acts of the Russian Federation are material.

The standard dot limit of materiality is 5%. In audit practice, it is considered that a deviation of up to 5% is insignificant, and a deviation of more than 5% is significant.

Methods for determining baseline indicators for calculating the materiality level:

1. The “basic array” method (selection of indicators from reporting forms that have the largest amounts (amounts exceeding the expected level of materiality)).

2. “Key risk indicators” (selection of indicators from reporting forms, characterized by the highest probability of errors, dishonesty).

3. “Key indicators in terms of consequences” (selection of indicators from reporting forms, errors or violations in which can cause significant consequences for the EP).

4. The method of “combined indicators” (selection of indicators from reporting forms using a combination of all the above methods).

Relationship between materiality and audit risk

When planning an audit, the auditor considers what could cause a material misstatement to be made. The materiality assessment helps the auditor decide which indicators to audit. This allows the auditor to select audit procedures that can potentially reduce the AR to an acceptably low level.

There is an inverse relationship between materiality and audit risk, i.e. the higher the level of materiality, the lower the level of audit risk, and vice versa. The inverse relationship between materiality and AR is taken into account by the auditor when determining the nature, timing and extent of audit procedures.

For example, if, at the end of the planning of audit procedures, the auditor determines that the acceptable level of materiality is lower, then the AR is increased. He compensates for this either by lowering the pre-estimated level of RSK and maintaining a lower level by conducting extended or additional tests of controls, or by reducing the pH of distortions by changing the nature, timing, and scope of substantive procedures.

Materiality and Audit Risk in Evaluating Audit Evidence

The assessment of materiality and AR at the initial stage of planning may differ from such an assessment after summing up the results of audit procedures. This may be due to a change in circumstances or a change in the auditor’s knowledge of the results of the audit. For example, if an audit is planned before the end of the reporting period, the auditor can only predict the results of business activities and the financial position of the AL. If actual results of operations and financial position are materially different from those forecasted, the assessment of materiality and AR may change.

The auditor, when planning his work, may deliberately set an acceptable level of materiality at a level lower than that which is supposed to be used to evaluate the results of the audit (to reduce the likelihood of misstatements being detected).

Audit sample

An audit sample (selective check) is the application of audit procedures to less than all elements of one reporting item or a group of similar transactions.

The population is the complete set of elements from which the auditor selects the population about which he wants to draw conclusions.

The size of the collection is the number of elements of the corresponding collection.

Population elements – individual elements reflected in the accounting and constituting the general population.

An error (during a selective audit) is a deviation from the normal functioning of an internal control or a distortion in accounting or reporting.

The error expected (preliminary, predictable) is the error that, in the opinion of the auditor, contains the general population.

Permissible error – max. the size of the HS error that the auditor considers acceptable.

Anomalous error – an error due to a single case, which cannot occur again and is not a representative error with the so-called. this general population.

Statistical sampling approach (statistical sampling) is the application of any sampling approach that has the following characteristics:

• random selection of the test population;

• application of probability theory to evaluate the results of the sample.

The risk associated with the use of audit sampling is the risk that arises when the auditor’s conclusion based on the selected population may differ from the conclusion that could be drawn if identical audit procedures were applied to the population as a whole.

Methods for selecting elements for testing in order to obtain audit evidence:

1. Select all elements (solid check) – more often used in the case of substantive audit procedures. May be appropriate if:

The general population consists of a small number of elements of a large number;

· the inherent risk and the risk of internal controls are high, and other means do not allow obtaining sufficient appropriate audit documents;

· the repetitive character of calculations and other processes carried out with the help of a computer system BU makes a complete check effective from the point of view. ratio of costs and results.

2. Select specific (certain) elements. The auditor may decide to select such population items based on the following factors:

Understanding the activities of the audited entity;

· a preliminary assessment of the inherent risk and the risk of cf-in internal control;

Characteristics and features of the tested general population.

Selected specific articles may include:

High-value items or so-called key sampling items;

Elements exceeding a certain value;

Elements for obtaining information;

elements for checking procedures.

3. Select individual elements (form an audit sample).

The procedure for the auditor when conducting a selective audit

1. Determining the understanding of the accounting and internal control system:

• for tests of internal controls;

• for substantive audit procedures.

2. Determination of the characteristics of the general population:

• for tests of internal controls;

• for substantive audit procedures.

3. Analysis of risk factors.

4. Determination of testing goals and deviation parameters

5. Determination of selection methods for testing:

• continuous check (selection of all elements);

• selection of specific (certain) elements;

• formation of an audit sample (selection of individual elements).

6. Construction of the sample.

7. Carrying out audit procedures.

8. The nature and cause of errors.

9. Extrapolation (propagation) of errors.

10. Evaluation of the results of checking the elements in the selected population.

Characteristics of sampling methods :

1) Random (non-repeated) selection: N = (Zk – Zn) * MF + Zn

2) Systematic selection:

Method of quantitative sampling by intervals

IV u003d (Zk – Zn) / EV

STV u003d IV * MF + Zn

H 2 u003d STV + IV; H i u003d H i -1 + IV

SV – sampling interval, STS – starting point of the sample, EV – number of sample elements

The method of cost sampling by intervals

IV u003d OS / EV, OS – the total volume of the general cos-ty in monetary terms.

STV u003d IV * MF

3) Unsystematic selection;

4) Selection of elements for checking by blocks (selection of adjacent elements of the general population. For example, primary documents of any section of accounting relating to one month)

The construction of an audit sample is carried out in order to obtain conclusions regarding the entire population based on testing selected elements of this population.

Evidence in the audit

Audit evidence is information that confirms or does not confirm the prerequisites for drawing up a b / o and on the basis of which the auditor draws conclusions that underlie the formation of an opinion on the reliability of a b / o.

In some cases, audit evidence may be the lack of information, which may be expressed, for example, by the refusal of the management of the entity being audited to provide the explanation requested by the auditor.

Audit evidence includes:

1) documents and accounting information of the audited entity;

2) information obtained from other sources (information obtained during the previous audit; information on the results of the auditor’s internal quality control procedures; information prepared by an expert of the AL management).

The auditor should design and perform appropriate audit procedures appropriate to the circumstances for the purpose of obtaining sufficient appropriate audit evidence.

Sufficiency of audit docking – a quantitative assessment of auditing docking. The number of audit documents required depends on the auditor’s assessment of the risks of misstatement (the higher the risks, the more evidence may be required), as well as the quality of such audit evidence (the higher the quality, the less evidence may be required).

Appropriate nature of the audit documents – a qualitative assessment of the audit documents, i.e. their relevance and reliability in support of the conclusions on which the auditor’s opinion is based.

Audit evidence should be obtained by the auditor by:

1. risk assessment procedures

2. further audit procedures, which consist of:

Tests of controls performed in accordance with the requirements of the FSAD or based on the professional judgment of the auditor;

· substantive procedures, including detailed tests and substantive analytical procedures.

To obtain audit dock-in, the auditor may apply audit procedures :

1. Request (appeal to knowledgeable persons (related and not related to financial activities), who are or are not employees of the AL, on the issue of interest to the auditor and evaluation of their answers)

2. Inspection (examination of records and documents, both internal and external, on paper or electronic media, as well as physical inspection of tangible assets)

3. Observation (visual examination of a process or procedure performed by others)

4. Confirmation (obtaining an audit document directly from a third party in the form of a written response on paper or electronic media)

5. Recalculation (checking the accuracy of arithmetic calculations in primary accounting and other documents, accounts)

6. Re-conduct (an independent performance by the auditor of a procedure or control activity that was originally performed within the entity’s internal control system)

7. Analytical procedures (assessment of financial information based on the analysis of the relationship between financial and non-financial data, the study of identified deviations and relationships)

The prerequisites for preparing a Ph / O are divided into the following categories:

a) Prerequisites for the preparation of financial (accounting) statements in relation to transactions of the same type and events that took place during the reporting period (prerequisites for the preparation of financial statements in relation to groups of similar business transactions, events and other facts of economic life) :

occurrence – the business transactions and events reflected in the accounting actually took place and relate to the activities of the audited entity;

completeness – all business transactions and events that should be reflected in the accounting have been reflected;

· Accuracy – the amounts and other data related to the business transactions and events reflected in the accounting have been properly reflected;

· assignment to the corresponding period – business transactions and events were reflected in the corresponding accounting period;

classification – business transactions and events were reflected in the relevant accounting accounts;

b) Prerequisites for the preparation of financial (accounting) statements in relation to the balance of accounting accounts as of the end of the reporting period (prerequisites for the preparation of financial statements in relation to balances of accounting accounts at the end of the reporting period):

Existence – the assets, liabilities and capital recorded in the accounting actually exist;

rights and obligations – the audited entity has the rights or controls the rights to the recorded assets, and the recorded liabilities represent precisely the obligations of the audited entity;

completeness – all assets, liabilities and equity that should be reflected in the accounting have been reflected;

· valuation and allocation – assets, liabilities and equity are included in the financial (accounting) statements in the appropriate amounts, and any resulting valuations and cost allocation adjustments are correctly reflected;

c) Prerequisites for the preparation of financial (accounting) statements in relation to the presentation and disclosure of information:

occurrence, rights and obligations – the events reflected in the reporting, business transactions and other facts actually took place and relate to the activities of the audited entity;

completeness – all events and facts that should have been included in the financial (accounting) statements were included in it;

Classification and Understandability – financial information is presented and described correctly, and the facts and events disclosed in it are reflected in an understandable form;

· accuracy and valuation – financial and other information is disclosed fairly and in appropriate amounts.

9. The official final document of the audit – the auditor’s report

Auditor’s report – an official document intended for users of the f / o of the audited entities, containing the opinion of the audit organization, individual auditor expressed in the established form on the reliability of the f / o of the audited entity.

Knowingly false AZ – an audit report drawn up without an audit or drawn up based on the results of an audit, but clearly contradicting the content of the documents submitted to the audit organization, an individual auditor and considered during the audit (an audit report is recognized as knowingly false by a court decision).

The auditor’s report must contain:

1) Name “Auditor’s report”;

2) Indication of the addressee;

3) Information about the audited entity: name, state. registration number, location;

4) Information about the audit organization, individual auditor;

5) The list (composition) of the b / o in respect of which the audit was carried out, indicating the period for which it was compiled;

6) Distribution of responsibility in relation to the specified b / o between the AL and the auditor;

7) Details of the work performed by the auditor to express an opinion (audit scope);

8) The opinion of the auditor, indicating the circumstances that have or may have a significant impact on the reliability of b / o;

9) Auditor’s signature; date of the auditor’s report.

Types of audit reports:

1) AP with an unmodified opinion (unconditional, positive opinion): b/o accurately reflects in all material respects the financial position of AL, the results of its FCD and cash flow for the reporting year.

2) AZ with a modified opinion:

• AZ with a qualified opinion (+/-)

• AZ with a negative opinion (-)

• AZ with disclaimer of opinion (0)

The auditor should express a modified opinion in the AA if:

• based on the audit evidence obtained, it is determined that the b/o, considered as a whole, contains material misstatements;

• He is unable to obtain sufficient appropriate audit evidence to determine that the b/o, taken as a whole, does not contain a material misstatement.

3) AZ containing an attention-grabbing part (may overlap with options 1 and 2) – is included in the AZ to draw the attention of users to:

• a circumstance reflected in the accounting (financial) statements, which, in the auditor’s opinion, is very important;

• a circumstance not reflected in the financial statements.

The structure of the audit report:

Introduction

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