A&A Playbook - Virtual-3 - McCabe and Duncan - Connecting-the-Dots--Seeing-the-Whole-Picture

3 - McCabe and Duncan - Connecting-the-Dots--Seeing-the-Whole-Picture

Pdf Summary

The document explains how effective audit risk assessment connects identified risks to relevant assertions and responsive audit procedures. Risk assessment identifies potential material misstatements from fraud or error at both the financial statement and assertion levels, guides audit planning, and helps focus resources. It is an ongoing, iterative process—not a repeat of last year’s approach.<br /><br />Auditors should identify significant classes of transactions, account balances, and disclosures (SCOTABDs), determine which assertions are relevant, and assess inherent risk based on factors such as complexity, subjectivity, change, uncertainty, and management bias or fraud. Low risk does not mean no risk, and controls or planned audit tests should not influence the inherent risk assessment. Significant risks require special consideration, specifically responsive procedures, and sufficiently persuasive evidence. Presumed significant risks include fraud risks, management override, revenue recognition, and certain significant unusual related-party transactions. Journal-entry testing should consider population completeness, fraud risks, the financial reporting process, and unusual entry characteristics.<br /><br />Audit responses should address the nature, timing, and extent of each procedure in light of the risk and assertion. For example, occurrence and cutoff risks in year-end sales may call for testing transactions around period end and reviewing contract terms; valuation risk in inventory reserves may require testing assumptions and data.<br /><br />Auditors should stand back to confirm that material classes, balances, and disclosures have been considered and that conclusions are reasonable. New or contradictory evidence—such as unexpected misstatements, acquisitions, or new revenue streams—may require revising risk assessments and the audit approach.<br /><br />Documentation should transparently link risks, judgments, controls, procedures, and any revisions. A final review should confirm that risks are clearly defined, assertions are appropriate, procedures address the assessed risks, and later evidence remains consistent with the original assessment.

Keywords

audit risk assessment

material misstatement

assertions

significant risks

fraud risk

inherent risk

audit planning

responsive audit procedures

revenue recognition

journal-entry testing