Question

1a. What is the role of risk assessment is setting the sampling size in a substantive audit testing?-Discuss

2. Can we compare control activities and control environment? -Discuss

Answer 1

Role of Risk assessment:

Audit has an inherent limitation with respect to time available and scope of the audit. This implies that we do not have unlimited time to check each and every aspect of financial statement in details while there be still be a risk of material misstatement in the financial statements.

Therefore, while performing a substantive audit procedure, we have to consider and prepare reasonable sample sizes which covers the complete population and gives us reasonable assurance about the true and fair view of the financial statements.

Now let's understand the importance of risk assessment in a simpler way, if we do not do a risk assessment of the whole business before setting the sample size, we might miss the important areas where there will be more risk of misstatement and give an incorrect opinion on the financial statements.

Risk assessment will help the auditor a better understanding of all the areas critical for a business based on their risk and materiality and he will be able to apply better professional judgment while setting sampling size.

For example, the areas where there is more risk, the sample size will be more. However, where risk is less, the sample size will be less.

Compare control activities and control environment

Control environment is much broader and less specific in comparison to control activities. This involves setting the tone of the organization's internal controls, providing discipline and structure. This includes - Organisation structure ( Hierarchy of various roles), commitment from the management and HR policies and procedures, management's outlook etc.

Whereas, on the other hand, control activities are much more specific and narrow. These involve policies and procedure based on the control environment set by the management. Control activities are segregation of duties, physical control, Flow of information etc.