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CMA Intermediate · Corporate Accounting and Auditing · Audit Risk, Internal Control, Internal Check and Internal Audit

In assessing the risks of material misstatement at a company, the auditor reviews management's own risk assessment process. According to SA 315, how is it decided whether that process is appropriate?

Whether management's risk assessment process is appropriate is a matter of auditor judgment, taking into account the nature, size and complexity of the entity. If appropriate, it helps the auditor identify risks of material misstatement, according to SA 315.

  1. AIt is appropriate only if the company is large and listed
  2. BIt is appropriate only if it eliminates all risks
  3. CIt is a matter of judgment, considering the circumstances including the nature, size and complexity of the entityCorrect
  4. DIt is appropriate if the board has approved it in writing

Explanation

SA 315 says that whether the entity's risk assessment process is appropriate to the circumstances, including nature, size and complexity, is a matter of judgment. If appropriate, it assists the auditor in identifying risks of material misstatement. Size or board approval alone is not the test.

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