(b) ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment, requires auditors ‘to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels’.
It is vitally important for auditors to assess engagement risks at the planning stage, this will ensure that attention is focused early on the areas most likely to cause material misstatements.
A thorough risk assessment will also help the auditor to fully understand the entity, which is vital for an effective audit. Any unusual transactions or balances would also be identified early, so that these could be addressed in a timely manner.
In addition, as most auditors adopt a risks based audit approach then these risks need to be assessed early in order for the audit strategy and detailed work programmes to be developed.
Assessing risks early should also result in an efficient audit. The team will only focus their time and effort on key areas as opposed to balances or transactions that might be immaterial or unlikely to contain errors.
In addition assessing risk early should ensure that the most appropriate team is selected with more experienced staff allocated to higher risk audits and high risk balances.
A thorough risk analysis should ultimately reduce the risk of an inappropriate audit opinion being given. The audit would have focused on the main risk areas and hence all material misstatements should have been identified, resulting in the correct opinion being given.
It should enable the auditor to have a good understanding of the risks of fraud, money aundering, etc. Assessing risk should enable the auditor to assess whether the client is a going concern.
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