Describe each of the step’s auditors use in assessing control risk and discuss why they are...

Describe each of the step’s auditors use in assessing control risk and discuss why they are important and why they are in the order they are.

Expert Solution

Control risk is the risk that a material misstatement would not be prevented, detected or corrected by the internal control systems. Control risk has also been defined under International Standards on Auditing. Assessment of control risk is the process of evaluating the effectiveness of the design and operation of an entity's internal control policies. Assessment of control risk is made for individual financial statement assertions.

The Steps used by an auditor in assessing control risk are as follows:

1. Obtain an understanding of entity's internal control policies.

2. Identify the potential misstatements in entity's internal control.

3. Identify necessary controls that could prevent or detect specific potential misstatements.

4. Perform test of controls.

5. Evaluate the evidence obtained from understanding relevant intenal control policies and make an assessment of the control policies.

IMPORTANCE of CONTROL RISK ASSESSMENT is as follows:

1. It helps to identify the risks involved in internal control and also helps to mitigate the risks.

2. It helps to address the individual financial statement assertions.

3. It helps to identify potential misstatements in internal control policies and also identify fraud if any.

4. Control risk assessment helps to establish effective and efficient internal control policies in the entity.

THE STEPS USED IN ASSESSMENT OF CONTROL RISK ARE IN THE ORDER THEY ARE BECAUSE:

1. IT HELPS THE AUDITOR TO UNDERSTAND THE ENTITY AND IT'S ENVIRONMENT AND THEN ACCORDINGLY ASSESS THE RISKS OF MATERIAL MISSTATEMENT.

2. DUE TO THE FOLLOWING SEQUENCE, THE AUDITOR IS ABLE TO IDENTIFY THE POTENTIAL MISSTATEMENTS IN ENTITY'S INTERNAL CONTROL POLICIES AND THEN ACCORDINGLY DECIDE BEST SUITABLE INTERNAL CONTROL POLICIES FOR THE ENTITY.

ekkarill92 answered 1 year ago

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