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Classified - Internal use

IDENTIFYING AND
ASSESSING THE RISKS OF
MATERIAL MISSTATEMENT
THROUGH
UNDERSTANDING THE
ENTITY AND ITS
ENVIRONMENT
PSA 315

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Classified - Internal use

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OBJECTIVE
FRAUD

UNDERSTANDING

Implemen
tation

IDENTIFY
ENTITY

Risks of
material
misstatement

ITS
ENVIRONMENT
INCLUDING
INTERNAL
CONTROL

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Design

Basis for

ASSESS

Responses to the
assessed risks of
material
misstatement

ERROR

Classified - Internal use

DEFINITIONS
a)
b)
c)
d)
e)

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Assertions
Business risk
Internal control
Risk assessment procedures
Significant risk

Classified - Internal use

REQUIREMENTS
Risk Assessment Procedures and Related Activities
The Required Understanding of the Entity and Its
Environment, Including the Entitys Internal Control
Identifying and Assessing the Risks of Material Misstatement
Material Weakness in Internal Control
Documentation

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Classified - Internal use

RISK ASSESSMENT PROCEDURES AND

RELATED ACTIVITIES
Provides a basis for the identification and assessment of risks of
material misstatement at the financial statement and assertion levels.
(Note: This does not provide sufficient appropriate audit evidence to
base the audit opinion.)
Includes:
Inquiries of management, and of others within the entity who in the
auditors judgment may have information that is likely to assist in
identifying risks of material misstatement due to fraud or error.
Analytical procedures (To be discussed in PSA 520).
Observation and inspection
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Classified - Internal use

REQUIREMENTS
Risk Assessment Procedures and Related Activities
The Required Understanding of the Entity and Its
Environment, Including the Entitys Internal Control
Identifying and Assessing the Risks of Material Misstatement
Material Weakness in Internal Control
Documentation

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Classified - Internal use

THE REQUIRED UNDERSTANDING OF THE

ENTITY AND ITS ENVIRONMENT, INCLUDING
THE ENTITYS INTERNAL CONTROL

The Entity
and Its
Environment

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Internal
Control

Classified - Internal use

THE REQUIRED UNDERSTANDING OF THE

ENTITY AND ITS ENVIRONMENT, INCLUDING
THE ENTITYS INTERNAL CONTROL
The auditor shall
obtain an
understanding
of the

Relevant
industry,
regulatory, and
other external
factors including
the applicable
financial
reporting
framework.

Measuremen
t and review
of the
entitys
financial
performance.

Nature of the
Entity

The Entity
and Its
Environment

Objectives
and
Strategies

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Selection and
application of
accounting
policies

Classified - Internal use

THE REQUIRED UNDERSTANDING OF THE

ENTITY AND ITS ENVIRONMENT, INCLUDING
THE ENTITYS INTERNAL CONTROL
Sources of Information:

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Classified - Internal use

10

THE REQUIRED UNDERSTANDING OF THE

ENTITY AND ITS ENVIRONMENT, INCLUDING
THE ENTITYS INTERNAL CONTROL
Control
Activities

Risk
Assessment

Internal
Control

Do you remember
your CRIME?
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Information
System

Components

Monitoring
Control
Environment

Classified - Internal use

11

REQUIREMENTS
Risk Assessment Procedures and Related Activities
The Required Understanding of the Entity and Its
Environment, Including the Entitys Internal Control
Identifying and Assessing the Risks of Material
Misstatement
Material Weakness in Internal Control
Documentation

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Classified - Internal use

12

IDENTIFYING AND ASSESSING THE

RISKS OF MATERIAL MISSTATEMENT
The auditor shall identify and assess the risks of material
misstatement at:
Financial
Statement
Level

Assertion
Level
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Transactions
Account
balances
Disclosures

Classified - Internal use

Basis for
designing
and
performing
further
audit
procedures
13

REQUIREMENTS
Risk Assessment Procedures and Related Activities
The Required Understanding of the Entity and Its
Environment, Including the Entitys Internal Control
Identifying and Assessing the Risks of Material Misstatement
Material Weakness in Internal Control
Documentation

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Classified - Internal use

14

MATERIAL WEAKNESS IN INTERNAL

CONTROL
The auditor shall communicate material weaknesses in internal
control identified during the audit on a timely basis to
management at an appropriate level of responsibility, and, as
required by PSA 260 (Revised), Communication with Those
Charged with Governance, with those charged with governance
(unless all of those charged with governance are involved in
managing the entity).

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Classified - Internal use

15

REQUIREMENTS
Risk Assessment Procedures and Related Activities
The Required Understanding of the Entity and Its
Environment, Including the Entitys Internal Control
Identifying and Assessing the Risks of Material Misstatement
Material Weakness in Internal Control
Documentation

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Classified - Internal use

16

DOCUMENTATION
The auditor shall document:

a) The discussion among the engagement team and the significant

decisions reached;
b) Key elements of the understanding obtained regarding each of the
aspects of the entity and its environment and of each of the
internal control components; the sources of information from
which the understanding was obtained; and the risk assessment
procedures performed;
c) The identified and assessed risks of material misstatement at the
financial statement level and at the assertion level;
d) The risks identified, and related controls about which the auditor
has obtained an understanding.
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Classified - Internal use

17

Questions?

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Classified - Internal use

18