Slide 69

 Now let us continue with the Assessment of Risks of Material Misstatement and the Design of
Further Audit Procedures.
 So, as discussed previously, risk assessment procedures allow the auditor to gather the
information necessary to obtain an understanding of the entity and its environments, as well as
its internal control.
 And ito ang nagsisilbing basis para sa pag-assess ng risk of material misstatements ng mga
financial statements. Tapos itong risk assessments na ito ay gagamitin or magagamit sa pag-
design ng further audit procedures gaya ng test of controls, substantive tests, or both.
 The objective of this section is to provide guidance on assessing the risks of material
misstatement and how to design further audit procedures that effectively respond to those
risks.

Slide 70
 Paragraph .26 of AU-C section 315 states that the auditor should identify and assess the risks of
material misstatement at the financial statement level and at the relevant assertion level related
to classes of transactions, account balances, and disclosures. For this purpose, the auditor
should:
 Read first point: So, habang iniintindi ng auditor ang entity and its environment, dapat din
bigyan ng pansin ng auditor ang classes of transactions, account balances, and disclosures in the
financial statements para ma-identify ang risks of material misstatements.
 Read second point: Pagkatapos ma-identify ang risks, i-aassess naman ito at i-eevaluate kung
gaano itong nakaka-apekto sa buong financial statements
 Read third point
 Read last point

Slide 71
 So, part na rin ng assessment of risks of material misstatements, ang pag-identify kung meron ba
sa mga risks na natukoy ang pwedeng tawaging significant risks, ito ang mga risks na kailangan
ng special audit consideration dahil pwedeng maging material or malaki ang magiging epekto
nito.
 Ang pag-determine ng significant risks ay nakadepende lang sa professional judgment ng
auditor.
 Read first point
 Read second point. So, ang nonroutine transactions ay mga transactions na minsan or bihira
lang mangyari. For example, losses due to fire or flood, major property acquisitions, asset write-
offs, and new product implementation.
 Sa pagrecord ng mga unusual transactions, maaaring hindi sapat yung knowledge or experience
ng client para ma-irecord nila iyon ng tama, kaya malaki ang chance na magkamali ang client sa
pag-record ng mga ganoong klase ng transaction.
 So, it is only logical for the auditor to estimate a high inherent risk in this situation.

Slide 72
 So, after ma-identify ang mga risks, ngayon magde-design at perform na naman ng further audit
procedures para masolusyonan ang mga risks na natukoy.
 Read point 1
 The objective outlined in this section is for the auditor to obtain sufficient appropriate audit
evidence regarding the assessed risks of material misstatement through designing and
implementing appropriate responses to those risks.
 Read last points
Slide 73
 So, the overall responses is the auditor’s responses to the risks of material misstatements. Ito
na ang mga audit responses or procedures or mga paraan na ginawa ng auditor para matugunan
ang mga risks na natukoy.
 The auditor's overall responses may include:
- emphasizing to the audit team the need to maintain professional skepticism in gathering and
evaluating audit evidence
- assigning more experienced staff or those with specialized skills or using specialists
- providing more supervision
- or incorporating additional elements of unpredictability in the selection of further audit
procedures to be performed
- Pwede ring baguhin ng auditor ang nature, timing, or extent ng audit procedures as on overall
response, like for example, increase the substantive testing of the valuation of numerous
significant accounts at year end because of significantly deteriorating market conditions.

Slide 74
 Further audit procedures are procedures whose nature, timing, and extent are based on, and
are responsive to, the assessed risks of material misstatement at the relevant assertion level.
 These are a combination of tests of controls, substantive tests of transactions, analytical
procedures, and tests of details of balances performed in response to risks of material
misstatement by the auditor's risk assessment procedures.
 So, may mga cases na ang ginagawa lang ng auditor ay substantive tests or procedures lang dahil
baka walang effective controls na pwedeng i-apply sa certain assertion. Pero pwede rin na i-
identify ng auditor na in addition sa substantive procedures, maaring maging effective response
to assessed risk of material misstatement ang test of controls.

Slide 75
 Read first, second, and third point
 Sa previous chapter, may nabanggit na components ng internal control such as the estimating
and biddings, billings, contract costs, and contract revenue. So, may iba sa mga control na ito na
hindi relevant sa audit or sap ag-detect ng material misstatement kaya hindi na kino-consider ng
auditor.
 Read last point

Slide 76
 In this section, the auditor is required to determine whether uncorrected misstatements are
material, individually or in aggregate. Sa point na ito, dapat din na i-reassess ng auditor ang
materiality ng misstatement to confirm kung relevant pa ba siya sa actual financial results ng
entity.
 Read first point
 At kung nag-refuse ang management na i-correct ang mga misstatements na iyon, the auditor
should obtain an understanding of management's reasons for not making the corrections and
should take that understanding into account when evaluating whether the financial statements
as a whole are free from material misstatement.
 Read last point
 In making this determination, the auditor should consider the size and nature of the
misstatements and the effect of uncorrected misstatements related to prior periods.

Slide 77
 This section provides evidence of the auditor's basis for a conclusion about the achievement of
the overall objectives of the auditor and evidence that the audit was planned and performed in
accordance with GAAS and applicable legal and regulatory requirements.
 Audit documentation should be prepared on a timely basis and be sufficient to enable an
experienced auditor to understand the nature, timing, extent and result of the procedures
performed, the audit evidence obtained and the significant finding or issues which arose, the
conclusions reached thereon and the significant professional judgments made in reaching those
conclusions.
  In short, and audit documentation ay ang mga records ng mga procedures na ginawa ng auditor,
mga audit evidence na nakuha nila at ang conclusion na nagawa nila base sa evidence.

Slide 78
 The auditor may identify deficiencies in internal control not only during this risk assessment
process but also at any other stage of the audit.
 The auditor should determine whether, on the basis of the audit work performed, the auditor
has identified one or more deficiencies in internal control.
 So, kapag may na-identify na deficiency sa internal control ang auditor, kailangan niya itong i-
evaluate to determine if they constitute significant deficiency or material weaknesses. At kapag
nalaman niyang hindi material weakness ang isang deficiency, dapat na i-consider ng auditor
kung ganoon din ba ang tingin o kung ganoon din ba ang magigng conlusion ng ibang prudent
officials.
 The auditor should communicate in writing to those charged with governance on a timely basis
significant deficiencies and material weaknesses identified during the audit, including those that
were remediated during the audit.

The risk of material misstatement is the risk that the financial statements of an organization have been
misstated to a material degree. This risk is assessed by auditors at the following two levels:
At the assertion level. This is further subdivided into inherent risk and control risk. Inherent risk is the
susceptibility of an assertion to misstatement because of error or fraud, before considering controls.
Control risk is the risk of misstatement that will not be prevented or detected by a reporting entity's
internal controls.
At the financial statement level. Relates to the financial statements as a whole. This risk is more likely
when there is a possibility of fraud.

Risk of material misstatement at the assertion level consists of the following inherent risk and control
risk. Inherent risk and control risk are related to company, its environment and its internal control and
the auditor assesses those risks based on evidence he or she obtains.

Risk of material misstatement at the financial statement level relate pervasively to the financial
statements as a whole and potentially affect many assertions. Risks of material misstatement at the
financial statement level may be especially relevant to the auditors consideration of the risk of material
misstatement due to fraud.

Indirect controls are controls which do not directly address the risks of a control objective not being
achieved, but have an impact on the effectiveness of direct controls in detecting, preventing or
correcting a failure to achieve a control objective on a timely basis.