Annual Audit Manual

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5012.1 Overview
Sep-2022

In this Section

Overview

Overview

CAS Guidance

Risk assessment analytics

Analytical procedures help identify inconsistencies, unusual transactions or events, and amounts, ratios, and trends that indicate matters that may have audit implications. Unusual or unexpected relationships that are identified may assist the auditor in identifying risks of material misstatement, especially risks of material misstatement due to fraud (CAS 315.A27).

Analytical procedures performed as risk assessment procedures may therefore assist in identifying and assessing the risks of material misstatement by identifying aspects of the entity of which the auditor was unaware or understanding how inherent risk factors, such as change, affect susceptibility of assertions to misstatement (CAS 315.A28).

Obtaining an understanding of the entity and its environment, the applicable financial reporting framework and the entity’s system of internal control

The auditor’s understanding of the entity and its environment and the applicable financial reporting framework may also assist the auditor in developing initial expectations about the classes of transactions, account balances and disclosures that may be significant classes of transactions, account balances and disclosures. These expected significant classes of transactions, account balances and disclosures form the basis for the scope of the auditor’s understanding of the entity’s information system (CAS 315.A49).

OAG Guidance

OAG Audit 5012 provides guidance on performing risk assessment analytics and on how we utilize the preliminary understanding obtained from our risk assessment procedures to develop initial expectations about risks of material misstatement and the classes of transactions, account balances and disclosures that may be significant to direct elements of the further risk assessment procedures that we perform.

Why is this important?:

  • We perform risk assessment analytics to identify unexpected or unusual relationships or changes such as inconsistencies, unusual transactions or events as well as amounts, ratios, and trends that may be indicative of risks of material misstatement. In designing risk assessment analytics, we utilize our understanding of the entity and its environment, that we obtained by performing initial risk assessment procedures, to develop our expectations of the account balance, classes of transactions, or performance measure to be covered by the analytics.

  • We also utilize this understanding of the entity and its environment, along with the understanding obtained from performing risk assessment analytics, to develop our initial expectations about risks of material misstatement and significant FSLIs. Doing this allows us to direct the focus of other risk assessment procedures, including identifying the significant business processes for which we need to understand and evaluate the related information systems as part of understanding an entity’s system of internal control.

OAG’s Risk Assessment Process

Within OAG Audit 5012, we discuss in more detail the Develop initial expectations element of the OAG Risk Assessment Process illustrated below.

OAG Risk Assessment Process