Chapter 4 Risk Assessment and Internal Control - Scanner
Chapter 4 Risk Assessment and Internal Control - Scanner
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• Audit Risk is the risk that the auditor gives an inappropriate audit
• Audit risk does not include the risk that the auditor might express
does not refer to the auditor’s business risks such as loss from
Audit Risk may be defined as the risk that the auditor gives an
inappropriate audit opinion when the financial statements are
materially misstated. Thus, it is the risk that the auditor may fail to
express an appropriate opinion in an audit assignment. Audit Risk
has three components: Inherent Risk, Control Risk and Detection
Risk. Inherent Risk and Control Risk are collectively known as Risk
of Material Misstatement.
Inherent Risk:
Control Risk:
Q.3 “The SAs do not ordinarily refer to inherent risk and control risk
separately, but rather to a combined assessment of the “risks of material
misstatement”. Explain. [RTP-Oct. 19]
Q.4 Discuss in brief the types of audit risk and inter relationship of
components of audit risk. [Nov. 14 (4 Marks)]
(b) Control risk: The risk that a misstatement that could occur
(ii) Detection Risk: The risk that the procedures performed by the
misstatements.
Misstatement (RMM).
low level.
Q.5 Explain the inherent risk with reference to the relevant standard on
auditing.
Or
(ii) Assess the identified risks, and evaluate whether they relate
level; and
auditor shall consider the reasons for the assessment given to the
inherent risk) and obtain more persuasive audit evidence the higher
Q.6 Doing a statutory audit is full of risk. Narrate the factors which causes
the risk.
Q.7 Discuss the following: Weaknesses in the design of the internal control
system and non-compliance with identified control procedures amongst
other conditions or events which increase the risk of fraud or error.
Or
Q.9 Write short note on: Assertion about balance at the end of the
reporting period. [May 13 (4 marks)]
Or
[Nov. 15 (5 Marks)]
[Nov. 17 (4 Marks)]
Q.11 Write short note on: Assertions used by auditor to consider potential
Q.12 The auditor shall identify and assess the risks of material misstatement
the identified risks, relate the identified risks and consider the
likelihood of misstatement.
misstatement at:
(b) Assess the identified risks, and evaluate whether they relate
material misstatement.
[RTP-May 18]
Q.14 The auditor may exercise his judgement to identify which risks are
significant risks. Explain the above in the context of SA 315.
[May 15 (6 Marks)]
Or
As part of the risk assessment, the auditor shall determine whether any
of the risks identified are, in the auditor’s judgment, a significant risk.
3. The title deeds of the lands disclosed in the balance sheet are held
in the name of the company.
4. Completeness
Q.16 State assertions that are implied in the extract of financial statement
given below:
(Rs.) (Rs.)
Less: Depreciation:
2,34,000
(d) The recorded assets are compared with the existing assets at
reasonable intervals and appropriate action is taken with
regard to any differences.
Or
Internal Control System can provide only reasonable but not absolute
assurance that its objective relating to prevention and detection of
errors/frauds, safeguarding of assets etc., are achieved. Briefly explain
the inherent limitations that the system suffers.
Or
(b) The fact that the most controls do not tend to be directed at
transactions of unusual nature.
controls;
Or
2. Commitment to competence.
3. Participation by TCWG.
5. Organisational Structure.
Q.21 “The auditor shall obtain an understanding of the major activities that
Explain.
operations.
Q.23 What is check list? Give few examples of check list instruction.
Or
[May 13 (4 Marks)]
Q.25 Write short note on: Use of Flow Charts in evaluation of internal
Or
evaluator’s findings.
show –
external sources;
or operations;
Q. 26 Why tests of controls are performed? Also explain what does they
include. [Nov. 15 (4 Marks)]
(i) design of the accounting and internal control systems, that is,
operated properly.
applications.
Q. 26A It has been suggested that actual operation of the internal control
4. The rate at which the order has been accepted and other terms
the party and particularly whether the party has honoured its
Or
10. what are the areas where control is weak and where it is
excessive; and
Or
Based on the results of the tests of control, the auditor should evaluate
whether the internal controls are designed and operating as
contemplated in the preliminary assessment of control risk. Analyse
and Explain. [RTP-Nov. 19]
human error.
control risk.
it flows.
Q.30 The auditor can formulate his entire audit programme only after he
has had a satisfactory understanding of the internal control systems
and their actual operation. Analyse and explain. [RTP-Nov. 18]
Or
satisfaction.
Or
The auditor should understand and consider the risks that may arise
from the use of information technology (IT) Systems.
[May 18 (4 Marks)]
Or
[RTP-May 19]
Or
Q.32 Write short note on: Provisions for applicability of internal audit as per
internal auditor.
financial year; or
financial year; or
Q.33 JKT (P) Ltd. having Rs. 40 lacs paid up capital, Rs. 9.50 crores reserves
and turnover of last three consecutive financial years, immediately
preceding the financial year under audit, being Rs. 49 crores, Rs. 145
crores and Rs. 260 crores, but does not have any internal audit system.
In view of the management, internal audit system is not mandatory.
Comment.
As per section 138 of the Companies Act, 2013, read with rule 13 of
Companies (Accounts) Rules, 2014 every private company shall be
required to appoint an internal auditor or a firm of internal
auditors, having-
In the instant case, JKT (P) Ltd. is having turnover of Rs. 260 crores
during the preceding financial year which is more than two
hundred crore rupees. Hence, the Company has the statutory
liability to appoint an Internal Auditor and mandatorily conduct
internal audit.
Q.34 “MMJ Ltd., an unlisted public company, did not appoint any internal
auditor for the financial year ending on 31st March, 2019. The company
had paid up capital of Rs. 20 crores and reserves of Rs. 25 crores. Its
turnover for the preceding 3 years were Rs. 75 crores for the year
ended 31st March, 2018, Rs. 150 crores for March, 2017 and Rs. 190
crores for March, 2016. The company had availed term loan from the
bank of Rs. 130 crores. The outstanding balance of the term loan as on
31st March, 2018 is Rs. 90 crores.”
As an auditor of the company, how would you deal with the above?
[Nov. 18 (5 Marks)]
As per section 138 of the Companies Act, 2013, read with rule 13 of
Companies (Accounts) Rules, 2014 every unlisted public company
having-
auditors,
capital of the company is less than ₹50 crores. Turnover for the
than ₹200 Crores. The company had availed term loan from the
₹100 crore at the time when loan was availed during the immediate
Sec. 138.
Q.35 Explain the meaning, objectives and scope of internal audit functions as
per SA 610. Also discuss who can be appointed as Internal Auditor?
[RTP-May 19]
[Nov. 19 (3 Marks)]
• As per Sec. 138 of the Companies Act, 2013, internal auditor shall
either be a chartered accountant (Whether in Practice or not) or a
cost accountant, or such other professional as may be decided by
the Board to conduct internal audit of the functions and activities
of the company.
4.7 – Internal Financial Control (IFC) and Internal Control over Financial
Reporting (ICFR)
Q.37 Write a short note on: Meaning of Internal Financial Control and
business, including
Compiled
Clause (i) of Sec. 143(3) of Companies by: Pankaj
Act, 2013 requires Garg
the
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company auditor to report whether the company has adequate
Chapter 4 “Risk Assessment and internal Control” ©www.altclasses.in
controls.
2 The scope of work of an internal auditor may extend even beyond the
• Risk management
• Governance
5 Inherent and Control Risk, and detection risk have same meaning.
[Nov. 13 (2 Marks)]
[May 14 (2 Marks)]
Management.
7 As per section 138 of the Companies Act, 2013 private companies are not
company having turnover of Rs. 200 Cr. or more during the preceding
public financial institutions exceeding Rs. 100 Cr. or more at any point
Auditor.
organisation.
control risk.
The use of computer facilities by a small entity may have the effect of
system:
[May 18 (2 Marks)]
18 The SAs ordinarily refer to inherent risk and control risk separately.
[RTP-May 19]
• The SAs do not ordinarily refer to inherent risk and control risk
material misstatement”.
[May 19 (2 Marks)]
Misstatements.
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Compiled by: Pankaj Garg
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