Question

Explain how an auditor assesses a for the risk of  material misstatement for an operational audit, compliance audit, and financial statement audit

Answer 1

According to AS 2110, it is the duty of an auditor to assess the risk of material misstatement for an operational audit, compliance audit and financial statement audit.

1. The auditor needs to perform risk assessment procedures that provide a reasonable basis for identifying and assessing the risks of material misstatement, which can be due to error or fraud and accordingly design further procedures for auditing.

2. The auditor needs to understand the company and its environment in order to understand the industry, the company's nature, the objectives and strategies of the company and the business risks associated with the company.

3. The auditor needs to evaluate whether the company's selection and the application of the accounting principles and policies are appropriate for the company's business and industry.

4. The auditor needs to understand the performance measures of the company by identifying it, that affects the risks of material misstatement whether it is external or internal.

5. The auditor also needs to obtain an understanding of the Internal Control over financial reporting in order to assess the risk of  material misstatement for an operational audit, compliance audit, and financial statement audit.

6. The auditor needs to understand the control environment of the company, which involves the management's actions, board actions, audit committee, which concerns the control environment of the company.

7. The auditor needs to understand the control of the company, perform walkthroughs, perform test of controls procedures, perform test of details procedures, perform analytical procedures and monitor controls in order to gain an understanding of the business processes of the company.