1. Overview

An auditor should perform risk assessment procedures, which enable the auditor to:

• Identify and assess the risks of material misstatement.

• Make informed judgments about other audit matters, including:

  • Materiality and tolerable misstatement.

  • The entity's selection and application of accounting procedures.

  • Areas relating to amounts or disclosures in the financial statements that require special audit consideration.

  • The development of expectations for analytical procedures.

  • The design and performance of further audit procedures, including tests of controls, when applicable, and substantive procedures.

  • The evaluation of audit evidence.

2. Obtaining an understanding of the entity and its environment

Obtaining an understanding of the entity and its environment is critical, as it establishes a frame of reference for planning and performing the audit. While the extent of this understanding is left to the auditor's professional judgment, it must be sufficient both to assess the risk of material misstatement and to design and perform further audit procedures. The auditor should obtain an understanding of the following factors, and should also consider whether any of the factors have changed significantly as compared with the prior period.

3. Other risk assessment procedures

The auditor should use the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control.

Inquiries are generally made of management and others within the entity. Inquiries may also be made of other parties, including the board of directors and audit committee, internal auditors, and parties outside the entity (external legal counsel, valuation experts, etc.).

Analytical procedures are evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. The members of the audit  team, including the auditor with final responsibility for the audit, other key members of the audit team, and specialists (as necessary), should discuss the susceptibility of the financial statements to material misstatement. If the audit involves multiple locations, then there can be multiple discussions. Important matters should be communicated to all engagement members not present for the discussion(s).