RISK ASSESSMENT PROCEDURES

1. Obtain an understanding:
- Entity and its environment: This involves understanding the nature of the business, its
industry, regulatory environment, and any significant changes that may impact financial
reporting.
- Applicable financial reporting framework**: Knowing which standards or regulations the
entity follows for financial reporting.
- Entity's system of internal control**: Understanding the processes and controls the entity
has in place to prevent and detect errors or fraud in financial reporting.

2. Consider materiality:
- Materiality refers to the significance or importance of a misstatement in the financial
statements. Auditors consider materiality when planning and performing the audit to
ensure that they focus on areas where errors could have a significant impact on users'
decisions.

3. Identify and Assess Risks of Material Misstatements (RoMMs):

- This step involves identifying specific risks that could result in material misstatements in
the financial statements. These risks could arise from various sources, such as fraud,
errors, or changes in the business environment.

4. Determine the acceptable level of Audit Risk:

- Audit risk is the risk that auditors may issue an incorrect opinion on the financial
statements. Auditors assess and determine the acceptable level of audit risk based on
factors such as the nature of the entity, its industry, and regulatory requirements.

5. Identify Detection Risk to determine the nature, timing, and extent of further audit procedures:
- Detection risk is the risk that auditors fail to detect material misstatements in the financial
statements. Auditors consider detection risk when designing further audit procedures,
such as tests of controls and substantive procedures, to reduce the risk to an acceptable
level.
TEST OF CONTROL

Test of Control (TOC) is a procedure performed by auditors to evaluate the effectiveness of an

entity's internal controls in preventing or detecting material misstatements in the financial
statements. Here's a comprehensive overview:

1. Purpose:
- The main purpose of a test of control is to assess whether the internal controls designed
and implemented by the entity are operating effectively. Effective internal controls
provide assurance that financial transactions are recorded accurately and in compliance
with relevant accounting standards and regulations.

2. Types of Controls:
- There are two main types of controls that auditors may test:
- Preventive Controls: These controls are designed to prevent errors or irregularities from
occurring in the first place. Examples include segregation of duties, authorization
procedures, and physical controls over assets.
- Detective Controls: These controls are aimed at detecting errors or irregularities that
have already occurred. Examples include reconciliations, reviews, and variance
analyses.

3. Testing Procedures:
- Auditors perform tests of controls through various procedures, including:
- Inquiry and Observation: Auditors may interview personnel and observe control activities
to understand how controls are performed.
- Inspection of Documents and Records: Auditors examine supporting documentation and
records to verify that controls have been applied as intended.
- Re-performance: Auditors may re-perform control procedures to validate their
effectiveness independently.
- Walkthroughs: Auditors may walkthrough specific processes to understand how controls
operate throughout the entire transaction cycle.

4. Sampling:
- In many cases, auditors use sampling techniques to select a subset of transactions or
controls to test. The sample should be representative of the population and provide
sufficient evidence to draw conclusions about the effectiveness of controls.
5. Evaluation:
- After performing tests of controls, auditors evaluate the results to determine whether the
controls are operating effectively. This evaluation involves assessing whether the
controls are designed appropriately and whether they have been implemented and
consistently applied.

6. Documentation:
- Auditors document their findings, including the procedures performed, the results of the
tests, any deviations or weaknesses identified, and the implications for the audit strategy.

7. Impact on Substantive Testing:

- The results of tests of controls can influence the extent and nature of substantive
procedures. If controls are deemed effective, auditors may rely more on the controls and
reduce the extent of substantive testing. Conversely, if controls are ineffective, auditors
may increase substantive testing to obtain sufficient assurance.

SUBSTANTIVE PROCEDURE

1. Substantive Procedures:
- Substantive procedures are audit procedures performed to detect material
misstatements in the financial statements. Unlike tests of controls, which focus on
evaluating internal controls, substantive procedures directly examine the underlying
transactions, account balances, and disclosures.

2. Test of Details:
- Test of Details involves the examination of individual transactions, account balances, and
disclosures to obtain audit evidence about their completeness, accuracy, and validity.
There are several types of test of details:
- Vouching: Auditors select transactions from the financial statements and trace them back
to the supporting documentation to verify the occurrence and accuracy of the recorded
transactions.
- Tracing: Auditors select items from the supporting documentation and trace them
forward to the financial statements to ensure that all relevant transactions have been
properly recorded.
- Confirmation: Auditors may send confirmation requests to third parties, such as
customers or vendors, to verify the accuracy and completeness of account balances or
transactions.
- Re-computation: Auditors independently recompute mathematical calculations, such as
inventory costing or depreciation expense, to verify the accuracy of recorded amounts.
- Observation: Auditors may physically observe inventory counts or other procedures to
verify the existence and condition of assets.

3. Substantive Analytical Procedures:

 - Substantive analytical procedures involve the analysis of financial information and
relationships to identify significant fluctuations, trends, or anomalies that may indicate
potential misstatements in the financial statements. These procedures include:
- Ratio Analysis: Auditors calculate and analyze financial ratios, such as liquidity ratios,
profitability ratios, and leverage ratios, to assess the financial health and performance of
the entity.
- Trend Analysis: Auditors compare current financial data with prior periods to identify
significant changes or trends that may require further investigation.
- Comparative Analysis: Auditors compare financial data with industry benchmarks,
budgets, or expectations to assess the reasonableness and consistency of recorded
amounts.
- Reasonableness Testing: Auditors use judgment to evaluate the reasonableness of
recorded amounts based on their understanding of the entity and its industry.

4. Nature, Timing, and Extent:

- The nature, timing, and extent of substantive procedures depend on various factors,
including the assessed risks of material misstatement, the effectiveness of internal
controls, and the specific characteristics of the entity and its industry. Auditors tailor their
procedures to obtain sufficient and appropriate audit evidence to support their
conclusions.

5. Documentation:
- Auditors document their substantive procedures, including the nature and purpose of the
procedures performed, the results of their tests, any significant findings or exceptions
identified, and the conclusions reached based on the audit evidence obtained.