AA 3101 – Auditing and  Performance of Risk

assessment procedures to
Assurance Principles identify/assess risk of material
misstatement through
Auditing begins when Accounting ends. understanding the entity.
*This is to ensure that the auditor plans an
Auditing audit engagement for which:
- Verification
- Determine if what is said is what it
 The auditor maintains the
purports to be
necessary independence and
ability to perform the
Financial Statements are the subject matter
engagement
of audit.
 There are no issues with
management integrity that
Audit Report - Output of Auditors
may affect the auditor’s
willingness to continue the
engagement
Assurance Services
 There is no misunderstanding
Attestation with the client as to the terms
of the engagement
Audit In summary, before accepting an
engagement with a new client, the CPA
firm shall assess whether it
Objective of Auditor: Determine whether
financial statements are free from material  Is competent to perform the
misstatements and are in accordance with engagement and has the
the Auditing Standards and Framework capabilities, including time
and resources to do so,
Risk-Based Audit Process – Three Phase  Can comply with the relevant
Process ethical requirements, and
 Has considered the integrity
1. Risk assessment (PSA 120 – PSA of the client and does not have
320) information the would lead it
a. Acceptance (Evaluate Clients to conclude that the client
before Accepting) lacks integrity.
 Relevant Ethical
Requirements must be 2. Risk Response (PSA 320 – PSA
satisfied 620)
 To understand the Risk, you a. Designing overall responses
have to understand the and further audit procedures to
Business Model. develop appropriate responses
 Identify the Risk, Assess the to the assessed risk of material
Risk misstatements
b. Planning the Audit b. Implementing responses to
assessed risk of material
 Develop an overall audit
misstatement to reduce audit
strategy and audit plan
risk to an acceptably low level
c. Performance

3. Reporting (PSA 700 – PSA 810)
a. Completion of work and
Issuance of Audit Report
b. Evaluating the audit evidence
obtained to determine what
additional audit work is
required.
c. Forming an opinion based on
audit findings and preparing the
auditor’s report
Understanding the audit risk model
Nature of risk
Risk – concept used to express uncertainty
about events and/or their outcomes that
could have a material effect on the
organization
1. Audit Risk – the risk that an
auditor may give an unqualified
opinion on financial statements that
are materially misstated.
a. Composed of:
i. Inherent Risk
ii. Detection Risk
iii. Control Risk
b. The auditor can control
audit risk through:
i. Avoid audit risk by not
accepting
companies as client
certain
ii. Set audit risk at a level
that the auditor believes
will mitigate the
likelihood that the
auditor will fail to
identify material
misstatements
2. Engagement Risk – economic risk
that a CPA firm is exposed to
simply because it is associated with
a particular client including loss of
reputation, inability of the client to
pay the auditor, or financial loss
because management is not honest
and inhibits the audit process.
Engagement risk is controlled by
careful selection and retention of
client.
3. Financial Reporting Risk – risks
that relate directly to the recording
of transactions and the presentation
of financial data in an
organization’s financial statements.
4. Business Risk – risk that affect the
operations and potential outcomes
of organizational activities
After Financial Statement Audit, we
proceed to Non-Assurance Services and
Non-Audit Services.
Assurance Service – provide a degree of
confidence to intended users
Non-Assurance Services – includes other
management consulting, accounting and
bookkeeping, tax services, agreed upon
procedures.
Non-Audit Assurance Services – services
related to review of financial statements,
due diligence, and valuation of assets.
Factors to
Consider in
Implementing
the Audit
Risk Model
Management Assertions
1. Existence or Occurrence
2. Completeness
 3. Rights and Obligations
4. Valuation and Allocation
5. Presentation and Disclosure

Factors to
Consider in
Implementing
the Audit
Risk Model