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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

Rao & Associates is auditing Kaveri Pharma Ltd. In the planning stage, the engagement partner proposes to assess the risk of material misstatement only at the overall financial statement level to save time. Under SA 315 (Revised), what is the correct audit response?

The auditor must assess the risks of material misstatement at both the financial statement level and the assertion level. Assertion-level assessments form the basis for designing further audit procedures, so limiting the assessment to one level or relying on management's register would not comply with SA 315 (Revised).

  1. AAccept the proposal, since SA 315 requires assessment only at the financial statement level
  2. BAssess risks only at the assertion level for classes of transactions, ignoring pervasive risks
  3. CAssess risks at both the financial statement level and the assertion level, since this provides the basis for designing further audit proceduresCorrect
  4. DAssess risks only for those areas where management has identified a risk in its own risk register

Explanation

SA 315 (Revised) requires identification and assessment of risks of material misstatement at both the financial statement level and the assertion level. The assertion-level assessment is what drives the nature, timing and extent of further audit procedures under SA 330. Limiting to one level, or relying on management's register, is not compliant.

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