Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment


The purpose of this Standard is to establish standard and provide guidance on obtaining an understanding of the entity and its environment including its internal control and to identify and assess the risks of material misstatement in financial statement audit. The ultimate objective is to reduce the audit risk to an acceptably low level.

– What is Audit Risk
– Types of Audit Risk
– Concept of Misstatements
– Risk Assessment Procedure and related activities
— Inquiries of management and others within the entity
— Analytical procedures
— Observation and inspection
— Discussion among the engagement team

– The Entity and its environment
– Entity’s Internal control
– Effect of use of  Information technology (IT)
– Components of Internal Control
— Control Environments
— Risk Assessment process
— Information system and communicator
— Control Activities
— Monitoring
– Identifying and assessing the risk of material misstatements
— Financial Statement Level
— Assertion Level
– Documentation

Case Study :-

A limited company having turnover of approximately ` 50 crore uses a tailor made accounting software package. In the said package, all transactions are recorded, processed and the final accounts generated from the system. The management tells you that in view of the voluminous nature of day books. There is no need to print them and that audit can be conducted on the computer itself. The management further assures you that any ‘query based reports’ as required can be generated and printed.

As a statutory auditor of the company, enumerate the procedures you would adopt to conduct the audit.


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