Shubham MangalShubham asked 2 years ago

Account Balance level audit risk and transaction level audit risk  🙁

1 Answers
Auditaudit Staff answered 1 year ago

Question and answer are not as per SA 315 so don’t apply it
they simplywants to focus on which accounts there is inherent risk. I am giving examples for each point for understanding in brackets
Evaluating Inherent Risk: To assess inherent risk, the auditor would use professional judgment to evaluate numerous factors, having regard to his experience of the entity from previous audit engagements of the entity, any controls established by management to compensate for a high level of inherent risk, and his knowledge of any significant changes which might have taken place since his last assessment.
Inherent audit risk at the level of Account Balance and Class of Transactions is:
1. Financial statements are likely to be susceptible to misstatement, required adjustment in the prior period for example, accounts which (Interest Expense of 5 months was inappropriately capitalised even after completion of construction) or which involve a high degree of estimation / Judgement. (Provision for Litigation)
2. Susceptibility of assets to loss or misappropriation, for example, assets which are highly desirable and movable such as cash. (Wages Payment in Construction Company)
3. The complexity of underlying transactions and other events which might require using the work of an expert. (Computation of Number of Shares in ESOP Scheme)
4. The completion of unusual and complex transactions, particularly at or near period end. (Demerger / Sale & Lease Back)
Key concepts Risk is high if there is Prior Period Misstatement / Complexity / Judgement (High Degree) / Unusual Transaction (near period End) / Susceptible to Loss (Chances)

SHORTCUT
Chief Justice PUTS risky cases aside
Complexity Judgement (High Degree)
Prior Period Misstatement Unusual Transaction (near period End) Transaction (near period End) Susceptible to Loss (Chances)

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