The assessment of control risk below the maximum should be based on evidence of the operating effectiveness of the controls. Control risk may be expressed qualitatively such as low, moderate, or high. Alternatively, the risk may be stated quantitatively as a percentage or a numerical probability such as.
Assessing control risk is a matter of professional judgment. In making the assessment, it is necessary for the auditor to :. The first two steps should be performed for all material financial statement assertions. The third step is required only when the auditor assesses control risk below the maximum Hrd.
Source : Modern Auditing — Walter G. We have already established that the internal auditor seeks to provide reasonable assurance that the controls in place are appropriate to manage material risks within the organisational appetite.
We have also established that the evidence on file should allow another professional internal auditor to arrive at the same conclusions and opinion. To achieve the above, we should follow clearly structured working papers. These will vary from team to team, and therefore in-house training and guidance should be provided on the completion of working papers and supporting evidence to be retained.
One of the key working papers within any audit file is that which summarises the evaluation of controls. This could potentially include:.
The prior consideration of expected controls is optional. However, it is good practice as it helps the internal auditor identify what they think should be in place in principle, before being unduly influenced by the actual controls in place. Risk assessment and response is quite different for Single Audits—all directed at federal program requirements and not toward traditional accounting systems.
Ching ming, yes, it makes more sense, when the volume of transactions is low — e. We used to do that. The article is excellent. We do A audits. One caveat- you have to test controls if doing an A audit i. I enjoy your posts and insight into our standards. In the article you do mention that we cannot default to maximum as many auditors felt they could do. We are required to gain an understanding of controls that relevant to the audit.
Based on that understanding we are to assess control risk. We establish RMM based on the controls as they exist. Granted once we establish RMM based on audit approach efficiency we can elect not to test controls and apply a completely substantive approach. That statement implies that we looked at the areas where material weaknesses could occur and found internal controls at least sufficient to prevent material misstatements including fraud.
One other item that I feel it necessary to address is your example relating to establishing RMM. By definition this is impossible. IR risk by definition is the risk the transaction or account balance has assuming no internal controls. In the audit risk formula there are two things that reduce that risk, the controls the client has CR and our audit steps DR. Internal controls cannot increase the IR. That understanding gained through risk assessment procedures provides the basis for the control risk assessment.
My post should have been clearer about the gaining of the understanding prior to assessing risk. Regarding the issue of a low inherent risk and a high control risk yielding a moderate risk of material misstatement, I think you are correct. The lower of the two is usually the RMM. I do see in Thomas Reuters guidance that they show the RMM at moderate when one is high and the other is low.
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