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CS Professional · Compliance Management, Audit and Due Diligence · Audit Principles and Techniques

An audit firm auditing Kaveri Foods Ltd assesses the risk of material misstatement. The engagement partner records inherent risk as 60% and control risk as 40% separately, while another team in the same firm records one combined rating of 'high'. A reviewer questions whether this is acceptable. What is the position under SA 200?

Both approaches are acceptable. SA 200 allows separate or combined assessments of inherent and control risk, expressed quantitatively or not, depending on the firm's methodology and practical considerations. The essential point is that the auditor makes appropriate risk assessments, which matters more than the method used.

  1. AOnly a combined assessment is permitted; separate assessment is a breach
  2. BOnly quantitative assessments in percentages are permitted
  3. CSeparate or combined assessments are allowed, and either may be quantitative or non-quantitative, provided appropriate risk assessments are madeCorrect
  4. DRisk assessment is optional where the client has a good reputation

Explanation

SA 200 says the auditor may make separate or combined assessments of inherent and control risk depending on methodology and practical considerations, and the assessment may be in percentages or non-quantitative terms. What matters is that appropriate risk assessments are made. Hence the first two options wrongly restrict the approach.

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