Question

Explain the importance of determining the appropriate audit procedure to perform. What is the risk if the audit procedure is not appropriate for the assertion being tested? Does this step relate to sampling risk or nonsampling risk?

Answer 1

Importance of determining Audit Procedures :

Determining correct audit procedures to perform is very important for overall santity of the auditing process. in order to deal with the risk of material misstatement at the financial statemnet, the auditor may have to change the audit procedures. the auditor may be deploying the more experienced staff or those with specialized skills or using specialists, providing more supervision, or incorporating additional elements of unpredictability in the selection of further audit procedures to be performed.

The auditor should design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the relevant assertion level. The purpose is to provide a clear linkage between the nature, timing, and extent of the auditor's further audit procedures and the risk assessments. In designing further audit procedures, the auditor should consider such matters as:

1. The significance of the risk
2. The likelihood that a material misstatement will occur
3. The characteristics of the class of transactions, account balance, or disclosure involved
4. The nature of the specific controls used by the entity, in particular, whether they are manual or automated
5. Whether the auditor expects to obtain audit evidence to determine if the entity's controls are effective in preventing or detecting material misstatements .

The nature of the audit procedures is of most importance in responding to the assessed risks. herein it is very important to see that one particular audit procedures may be useful in one circumstance while not in the other one so it is important that correct audit procedure is selected.

In the circumstances wherein the audit procedure is not appropriate to the audit assertion, the audit result may not be reliable and there is a possibility of inaccurate/factual reporting.

This step of determing the audit procedure relate to non sampling risk. The Nonsampling risk includes all the aspects of audit risk that are not due to sampling. An auditor may apply a procedure to all transactions or balances and still fail to detect a material misstatement. Nonsampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective. For example, confirming recorded receivables cannot be relied on to reveal unrecorded receivables. Nonsampling risk also arises because the auditor may fail to recognize misstatements included in documents that he examines, which would make that procedure ineffective even if he were to examine all items. Nonsampling risk can be reduced to a negligible level through such factors as adequate planning and supervision and proper conduct of a firm's audit practice.