Audit Risk, Financial Statement Level and Assertion Level - Lesson 2

In this lecture, 4.02 – Audit Risk, Financial Statement Level and Assertion Level – Lesson 2, Roger Philipp, CPA, CGMA, continues the discussion of an auditor’s approach to audit evidence and substantive testing. An auditor should respond to the assessed level of audit risk at both the financial statement level and at the relevant assertion level. Roger talks about some auditor responses to risks of material misstatement at the financial statement level, including incorporating more unpredictability in audit procedures, and at the relevant assertion level, including performing substantive procedures to test the existence assertion for inventory. If you’re wondering: What does each element of the nature, timing and extent of audit procedures mean? What is the difference between a substantive audit approach and a combined approach? You’ll find out the answers to these questions and more! Connect with us: Website: https://accounting.uworld.com/cpa-review/ Blog: https://accounting.uworld.com/blog/cpa-review/ Twitter: https://twitter.com/UWorldRogerCPA Facebook: https://www.facebook.com/UWorldRogerCPAReview Instagram: https://www.instagram.com/uworldrogercpareview/ Pinterest: https://www.pinterest.com/uworldrogercpareview/ LinkedIn: https://www.linkedin.com/company/uworld-roger-cpa-review Are you accounting faculty looking for FREE CPA Exam resources in the classroom? Visit our Professor Resource Center: https://accounting.uworld.com/cpa-review/partner/university/ Video Sneak Peek: It says, "In order to reduce audit risk to an acceptably low level, the auditor should respond to the assessed level or risk in two ways, at the financial statement level and at the relevant assertion level." So, at the financial statement level versus at the detailed assertion level. Alright, at the financial statement level, the auditor will consider the users of the financial statements and the purpose for which they will be used to determine if management may have an incentive to over or understate the results of operations and financial position. Is management concerned with overstating or understating the results of operations income statement and financial position, is your balance sheet. To address the risk of material misstatement at the financial statement level, some of the auditor's responses to reduce audit risk to an acceptably low level. Again, we're trying to reduce audit risk. Audit risk, IR, CR, DR. So, we're trying to reduce our audit risk to an acceptably low level. A, or the first bullet, an increased need for professional skepticism. Skepticism, question and doubt everything. Consider assigning more experienced staff. Increase the level of supervision. Incorporate more unpredictability in audit procedures. That's important. You don't want the client to know that, "Oh yeah, every year they do the same test week. Every year they do the same accounts. Every year they have the same level of materiality." We want to be unpredictable. It's kind of like saying we're going to come out and do an inventory observation but we're not going to tell you which location we're going to count first. Adjust the nature, timing and extent of further audit procedures such as shifting interim testing to year-end. So what that means is, instead of doing interim, interim means before the end of the year, and then rolling it forward, it says, you know what? If we want to be more cautious, do it at the end of the year. Because the balance at December 31st is more accurate than the balance October 31st, happy Halloween, and rolling it forward. The auditor should design and perform further audit procedures whose nature, timing and extent are responsive to the assessed risks of material misstatement at the relevant assertion level. The auditor should consider, so here's what we're considering, it says here, "The significance in probability, the significance in probability that a material misstatement will occur, the characteristics of the class of transactions, account balances and disclosures, the nature of the controls used, whether the auditor needs to test the operating effectiveness of the controls in preventing or detecting material misstatements."