Phase II : assess the risk of material misstatement The auditor has identified various risk of material misstatement.

In the process of assessing the risk of financial misstatement the auditor : a. b. c. d. Related risk factors to potential financial statement misstatements Determines whether risk are of a magnitude Determines the likelihood of material misstatements Determines the existence of significant inherent risk

1. Related risk factors to potential financial statement misstatements Initially the auditor must relate the risk factor identified while performing risk assessment procedures to potential for misstatements in the financial statements. assertion Level Risk

An assertion level risk is one that influence only one or a few assertions. For example, an audit client may have recently implemented a new accounting system. Alternatively, the auditor might identify a business risk associated with the introduction of new technology. Similarly, the application of a new accounting pronouncement may have a very targeted impact on the financial statement. Financial statement level risk A Financial statement level risk is one in which the risk factor relates pervasively to the financial statement as a whole. In a similar way, if management lack significant accounting knowledge, this could have a pervasive impact on multiple transaction classes and assertion. A weakness in internal control may have a pervasive impact on the financial statements. 2. determine the magnitude of potential misstatement When assessing inherent and control risk for an audit client, the auditor must determine the magnitude of potential misstatement related to the risk factors. Every statement from the FASB comes with a qualification that it need not be applied to immaterial items. In some cases management might account for immaterial transaction incorrectly because it is expedient. 3. Determines the likelihood of material misstatements In addition to examining the magnitude of potential risk, the auditor also needs to determine the likelihood that those risks will result in a material misstatement in the financial statements. It is common to auditors to identify risk factor associated with high inherent risk where the likelihood of material misstatements is reduced by the clients systems of internal control. Auditor also need to be vigilant to uncover material misstatement in the financial statement, even if they are low-probability events. 4. Determines the existence of significant inherent risk

GAAS state that auditor should determine which of the identified risk are, in the auditors judgment, significant inherent risk that require special audit consideration. Significant inherent risk arise in most audits, but determining those risk is a matter of the auditors professional judgment and excludes the auditors consideration of the auditors consideration of internal control. In identifying significant inherent risk the auditor consider matters such as : Whether the risk is a risk of fraud Whether the risk is related to recent economics, accounting, or other development that require special attention. The complexity of the transaction that may give rise to the risk Whether the risk involves significant transaction with related parties. Whether the risk involves significant nonroutine transactions Whether the risk involves judgmental matters Significant business risk are often significant inhern risk Phases III : RESPOND TO ASSESED RISK Common responses to assessed risks include decision about the : 1. 2. 3. 4. Staffing and supervising of the audit Nature of audit test Timing of audit tests Extent of audit tests

STAFFING AND SUPERVISIONS