Increasing Audit Profits Series No. 13—Maximizing Substantive Evidence from Risk Assessment Procedures—Part One

The risk assessment standards make it clear that all risk assessment procedures produce substantive evidence for evaluating financial statement assertions. Since performing risk assessment procedures is an essential part of an audit strategy, more evidence gathered during risk assessment results in less evidence required from more costly detailed tests of balances. To say it another way, maximizing substantive evidence from risk assessment procedures can result in increased engagement profitability!

In each of the next few blogs, I’ll focus on several key risk assessment procedures and how the substantive evidence from risk assessment procedures can be considered in an audit strategy and how it can reduce the assessed level of risk of material misstatement at assertion levels. Here is a summary list of common risk assessment procedures and/or documentation:

  • Making and documenting client acceptance or continuance decisions.
  • Reviewing prior year working papers, considering findings and conclusions, adjusting journal entries, uncorrected audit differences and assessing their impact on the current year’s risk assessment.
  • Reading the current year’s general ledger activity and preparing a memo or spreadsheet documenting parameters and findings.
  • Performing and documenting other preliminary analytical procedures (at least comparing the current year’s unadjusted account balances with prior year adjusted balances).
  • Preparing flowcharts or memos documenting the client’s accounting and internal control systems and the performance of systems walk-through procedures for major transactions cycles.
  • Calculating tolerable misstatement by financial statement classification based on risk.
  • Completing applicable practice aids and other documentation from the firm’s accounting and auditing manuals.
  • Preparing a linking working paper combining risk of misstatements due to error and fraud to determine the level of risk of material misstatement for relevant assertions in material financial statement classifications.
  • Designing a detailed audit plan (program) that links significant risks with appropriate procedures (tests of controls, analytical procedures and/or detailed tests of balances).

In my next blog, we’ll cover how to obtain huge amounts of substantive evidence by reading (scanning) an audit client’s general ledger.  More detailed information on developing cost-beneficial audit strategies is available in my live and on-demand webcasts which can be accessed by clicking the applicable box on the left side of my home page at www.cpafirmsupport.com .

 

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by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

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