Auditing 1

Auditor's Respond to
Assessed Risk
Presented by Group 9
Mr. Abdul Hamid Cebba, MBA. Ak. CA. CPA
 MEET OUR TEAM

Sashi Nurayu Putri Wahyuningrum Atika Nurrohmah

11220820000021 11220820000081 11220820000154
 TABLE OF CONTENT
Process For Assessing Design Tests Of Control
01 04
Control Risk A Year in Preview

Assess The Risks Of

Assessment Of Control 05
Material Misstatement
02 Risks For The
Information And Substantive Test
06
Technology Design

Develop An Audit
Influence Of Audit 07
03 Program On
Strategy
Substantive Test
 Control Risk Assessment

Assess whether the Determine the control risk Using the control risk
financial statements assessment supported by
matrix to determine
can be audited the understanding
control risk
obtained

Identify control Communicate to parties

deficiencies, significant concerned with
deficiencies and governance and to
material weaknesses management
Control Risk Assessment
Management
Assess whether the Integrity
financial statements
can be audited Adequate
Accounting
Records

Determine the control

risk assessment Entity Level
supported by the
understanding obtained Transaction
Level
 Control Risk Assessment
Using the control
risk matrix to
determine Stages in assessing control risk
control risk using a control risk matrix:
Assess control risk by 1. Identify audit objectives
linking key controls and 2. Identify existing controls
control deficiencies to 3. Link controls to the audit
audit objectives of objectives in question
transaction classes, 4. Identify and evaluate control
account balances and deficiencies, significant
disclosures deficiencies, and material
deficiencies
Control Risk Assessment
Identify control
deficiencies, significant
deficiencies and material
weaknesses

Five stages for identifying deficiencies:

1. Identify existing controls
2. Identify missing key controls
3. Consider the possibility of alternate controls
4. Determine whether there are significant
deficiencies and material weaknesses
5. Determine potential misstatements that could
occur
Evaluating Significant
Control Deficiencies
 Control
Risk Matrix
Control Risk Assessment
Communicate to
parties concerned
with governance and
to management

The auditor must convey significant deficiencies and

material weaknesses in writing to the audit committee
and management
For control deficiencies identified by the auditor, it is
sufficient to communicate them to management so that
management can improve the company's operations.
 Assessment Of Control Risks For The
Information And Technology

TEST DATA PARALLEL EMBEDDED AUDIT

SIMULATION MODULE
Auditors process their Auditors often use The auditor inserts an
own test data using auditor-controlled audit module into the
software to perform the
client computer systems client's application
same operations as the
and application programs client's software, using system to identify certain
to determine whether the same data files. types of transactions.
automated controls are Various software
processing test data (generalized audit
softwares), for example
correctly.
ACL, IDEA
 Influence of Audit
Strategy
The influence of audit strategy refers to the plans and
approaches used by auditors in the audit process influencing
audit results and the resulting opinion. Audit strategy includes 1. Determining the Focus Area
planning, implementing and monitoring audit procedures 2. Testing Approach
carried out to ensure that the company's financial reports are 3. Use of Technology
accurate and free from material errors or fraud. The following 4. Scheduling and Allocation
are important factors that influence it: 5. Scheduling and Allocation
6.Compliance with Standards
Desain Tests Of Control

A test of control is a type of audit procedure

designed to evaluate the effectiveness of
internal controls. It involves examining the
procedures and policies followed by an
organization to mitigate risks and ensure
compliance with laws and regulations.
 Purpose of Test of Control

Determine and supervise the Testing the operational effectiveness of

implementation of activities within controls in supporting the reduction of
the company. assessed control risks.

Scope of Test of Control

A. Accounting System B. Elements of Internal Control

C. Internal Control Questionnaire D. Control Testing Program

 Stages in Test of Control
A. Review and review the internal controls that have been
outlined.
B. Preliminary verification of outlined controls.
C. Conceptual evaluation or preliminary evaluation of
controls.
D. Implementation of compliance procedures.
E. Final evaluation of internal controls.
 Procedures for Test of Control
According to Arens, et al, translated by Amir Abadi Yusuf (2003), there are four
procedures for testing controls, namely:
A. Conduct interviews with appropriate client
personnel.
Although audits are generally not a strong source
of evidence regarding the effective operation of
controls they are an appropriate format of
evidence.
B. Testing Documents, Archives and Records.
Many obstacles leave clear traces or documentary
evidence.
C. Observe Control-Related Activities.
Other types of activities related to control do not
leave a trace of evidence.
D. Re-carry Out the Client Procedure.
There are also control-related activities that
involve documents and files, but the content of
them is not sufficient for the auditor's purposes of
assessing whether the controls are operating
effectively.
 Guidelines for Designing
Test of Control in audits:
1. UNDERSTANDING
INTERNAL CONTROL.
Before designing a control
test, the auditor should
understand:
- Internal Control Structure
- Procedures and Policies
2. IDENTIFY RELEVANT
CONTROLS
3. DETERMINATION OF
The auditor must identify CONTROL TEST
controls that are relevant to OBJECTIVES
the audit objectives. The
Each control test should be
selected operation should:
designed to achieve a
- Affect financial
specific goal, such as:
statements.
- Ensuring the existence and
- It can reduce the risk of
effectiveness of control.
material misdelivery.
- Tests whether controls
operate consistently over
the audited period.
 Guidelines for Designing
Test of Control in audits:
4. CONTROL TEST
PROCEDURE DESIGN
Control test can include a
variety of techniques, such
as:
1. Inquiry
2. Observation
3. Inspection
4. Reperformance
5. DOCUMENTATION AND
EVALUATION
- Documentation: The 6. REPORTING
auditor should document
Prepare a report
each step and findings from
summarizing the results of
the test.
the control test, including
- Evaluation: Assessing
the identification of
whether the controls are
control weaknesses and
operating effectively and
recommendations for
whether there are any
improvement.
weaknesses in the controls
that require attention.
 Assessing the Risks of
Material Misstatement
The risk of material misstatement is a function of inherent risk
and control risk. The risk of material misstatement is the
susceptibility of financial statements, accounts and assertions
to material misstatement, and the risk that the client's current
internal controls will not be effective in proactively
identifying and correcting misstatements.
 Factors that can increase the risk of
Risk of Material material misstatement at a financial
Misstatement at the statement level include:
Financial Report
1. Managerial incompetence.
Level
2. Poor supervision by the board of
directors.
3. Inadequate accounting systems
The risk that certain risks may affect the and records.
financial statements as a whole and have 4. Declining economic conditions.
the potential to have a major impact on 5. Operating in a rapidly changing
some assertions. industry.
 Generally Accepted Auditing Standards
(GAAS) require auditors to assess the
risks of material misstatement at the
assertion level for all classes of
transactions, account balances,
presentations, and accompanying
Risk of Material
disclosures.
Misstatement at the
Assertion Level The auditor must develop audit objectives
for each individual assertion and perform
audit procedures to collect the audit
evidence necessary to achieve the audit
objectives.

Risk Assessment
Procedure
These procedures are designed to
provide a comprehensive understanding
of the client's business and its internal
controls, in order to understand the risks
of material misstatement in the audit
planning process.
Auditors perform risk assessment
procedures to understand the client
and its business environment as well
as the client's internal controls. This
procedure includes:
1.Questions from Managers and
Relevant Stakeholders
2. Procedure Analysis
3. Observation and Investigation
4.Discuss Engagement with the Team
5.Other Risk Assessment Procedures
 TYPES OF RISK IN
RISK ASSESSMENT
4. Significant Transactions
1. Risk Of Fraud
with Related Parties

2. Economic, Accounting or 5. Degree of Subjectivity in

Other Development Risks Measurement

3. Complex Transactions 6. Non-Routine Transactions

 Substantive Test Design
Substantive testing produces audit evidence about the reasonableness of each
significant financial statement assertion. This testing can reveal errors or
monetary misstatements in the recording and reporting of transactions and
account balances.
Substantive test design includes:
a) Determination of substantive characteristics
b) During testing
c) The scope of testing required to meet the detection risk level for each assertion
 Substantive Test Design

1.
- Audit procedures vary according to the level of detection risk.
A. Determination - Low risk of detection → more effective and expensive
procedure.
of Substantive - High risk of detection → less effective and cheaper procedure.
Test type:
Characteristics 1. Identify high risk audit areas.
2. Substantive testing of specific assertions.
3. Additional detailed testing.
4. Primarily substantive approach.
5. Analytical procedures to identify possible misstatements at
low cost.
 Substantive Test Design

2. Testing Detailed Transactions

A. Determination - Depreciation and examination of supporting evidence.
- Focus on monetary errors or misstatements.
of Substantive - Depreciation is useful for finding understatements.
- Examination of supporting evidence to find overstatements.
Characteristics - Requires high time and costs, but lower than detailed balance testing

3. Testing Detailed Account Balances

- Focus on proof of account balance.
- High detection risk → limited audit procedures and low required
evidence.
- Low detection risk → audit procedures are more extensive and
evidence required is high.
 Substantive Test Design
B. When Testing
- High risk of detection → substantive
testing several months before the end
of the year.
- Low detection risk → testing close
to or at the balance sheet date.
C. Scope of Testing
- More audit evidence for low
detection risk.
- The amount of audit evidence is
adjusted to the scope of testing,
including sample size.
- Statistical approaches can be used to
determine sample size.
Develop An Audit Program On Substantive Test
Financial Reports Contain Five Classes of Assertions :
1. Existence and occurrence. 4. Assessment or allocation.

3. Rights and obligations.

2. Completeness. 5. Presentation and disclosure.

Express an opinion whether the client's

Audit financial statements are presented fairly in
accordance with generally accepted
Objective accounting principles
 Develop An Audit Program
On Substantive Test
> General Framework for Audit Program Development <

Determine Initial Audit

1.
Procedures

2. Define Analytical Procedures

Specify Testing Against

3.
Detailed Transactions

4. Specify Testing Against

Detailed Accounts
 References
Arens, Alvin, Beasley, Elder, Auditing and Assurance services – an integrated approach. Global
Edition. Pearson Education Limited 2017.

Iwan Koerniawan, S.E., M.Th., M.Si (2021), AUDITING: Konsep dan Teori Pemeriksaan Akuntansi,
yayasan prima Agus teknik, accessed on 23/06/24: 14.36 p.m.

Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Audit and Assurance Services: An Integrated
Approach, Global Edition (16th ed.). Pearson.

Schmidt jeff, https://corporatefinanceinstitute.com/resources/career-map/sell-side/risk-

management/risk-of-material-misstatement/accessed on 22/06/24: 21.47 a.m
Question Time
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