J. K.

SHAH CLASSES INTER CA – AUDIT

CHAPTER 4 RISK ASSESSMENT AND INTERNAL CONTROL

Q.no Reference Question Answer

1 ICAI XYZ Ltd is engaged in the business Inherent Risk:
Module and running several stores dealing Because items may have been misappropriated
in variety of items such as ready by employees, therefore, risk to the auditor is
made garments for all seasons, that inventory records would be inaccurate.
shoes, gift items, watches etc. Control Risk:
There are security tags on each There is a security tag on each item displayed.
and every item. Moreover, Moreover, inventory records are physically
inventory records are physically verified on monthly basis. Despite various
verified on monthly basis. controls being implemented at the stores, still
Discuss the types of inherent, collusion among employees may be there and
control and detection risks as risk to auditor would again be that inventory
perceived by the auditor. records would be inaccurate.
Detection Risk:
Auditor checks the efficiency and effectiveness
of various control systems in place. He would
do that by making observation, inspection,
enquiry, etc.
In addition to these, the auditor would also
employ sampling techniques to check few sales
transactions from beginning to end. However,
despite all these procedures, the auditor may
not detect the items which have been stolen or
misappropriated
2 ICAI The auditor of ABC Textiles Ltd Obtaining an understanding of the entity and
Module chalks out an audit plan without its environment, including the entity’s internal
understanding the entity’s control (referred to hereafter as an
business. Since he has carried out “understanding of the entity”), is a continuous,
many audits of textile companies, dynamic process of gathering, updating and
there is no need to understand analysing information throughout the audit.
the nature of business of ABC Ltd. The auditor should proceed accordingly
Advise the auditor how he should
proceed
3 ICAI Prince Blankets is engaged in While understanding entity and its
Module business of blankets. Its major environment, internet sales is being perceived
portion of sales is taking place as risky area by the auditor and thereby would
through internet. Advise the be spending substantial time and extensive
auditor how he would proceed in audit procedures on this particular area
this regard as to understanding
the entity and its environment.
4 ICAI Auditor GR and Associates, The auditor shall obtain an understanding of
Module appointed for audit of PNG Ltd, a internal control relevant to the audit. Although
manufacturing company engaged most controls relevant to the audit are likely to
in manufacturing of various food relate to financial reporting, not all controls
items. While planning an audit, that relate to financial reporting are relevant to
the auditor does not think that it the audit. It is a matter of the auditor’s
would be necessary to professional judgment whether a control,
understand internal controls. individually or in combination with others, is
Advise the auditor in this regard relevant to the audit
5 ICAI “The auditor shall obtain an (i) Monitoring of controls Defined: Monitoring
Module understanding of the major of controls is a process to assess the
activities that the entity uses to effectiveness of internal control performance
monitor internal control over over time.
 J. K. SHAH CLASSES INTER CA – AUDIT
financial reporting” Explain (ii) Helps in assessing the effectiveness of
controls on a timely basis: It involves assessing
the effectiveness of controls on a timely basis
and taking necessary remedial actions.
(iii) Management accomplishes through
ongoing activities, separate evaluations etc.:
Management accomplishes monitoring of
controls through ongoing activities, separate
evaluations, or a combination of the two.
Ongoing monitoring activities are often built
into the normal recurring activities of an entity
and include regular management and
supervisory activities.
(iv) Management’s monitoring activities
include: Management’s monitoring activities
may include using information from
communications from external parties such as
customer complaints and regulator comments
that may indicate problems or highlight areas in
need of improvement.
(v) In case of Small Entities: Management’s
monitoring of control is often accomplished by
management’s or the owner-manager’s close
involvement in operations. This involvement
often will identify significant variances from
expectations and inaccuracies in fi nancial data
leading to remedial action to the control.
6 ICAI “Risk of material misstatement Q10 Chap 3
Module consists of two components”
Explain clearly defining risk of
material misstatement
7 ICAI “The SAs do not ordinarily refer to Q10 Chap 3
Module inherent risk and control risk
separately, but rather to a
combined assessment of the
“risks of material misstatement””
Explain
8 ICAI “The auditor shall obtain an The control environment includes: (i) the
Module understanding of the control governance and management functions and (ii)
environment” Explain stating the attitudes, awareness, and actions of those
what is included in control charged with governance and management .
environment. (iii) the control environment sets the tone of
an organization, influencing the control
consciousness of its people.
Elements of the Control Environment:
(a) Communication and enforcement of
integrity and ethical values
(b) Commitment to competence
(c) Participation by those charged with
governance
(d) Management’s philosophy and operating
style
(e) Organisational structure
(f) Human resource policies and practices