Auditing and Assurance
Auditing and Assurance tests the candidate's ability to plan and perform an audit of historical financial statements under Egyptian Auditing Standards, which are based on ISA. The exam focuses on risk assessment, evidence, materiality, sampling, going concern, and the correct form of the auditor's report.
Audit risk and planning
- Audit risk = inherent risk × control risk × detection risk. Detection risk is the only component the auditor controls through the nature, timing and extent of procedures.
- Obtain an understanding of the entity and its environment, including internal control, to identify risks of material misstatement at the financial statement and assertion levels.
- Set materiality for the financial statements as a whole, then performance materiality below it to reduce the probability that uncorrected misstatements exceed materiality.
- Design further audit procedures: tests of controls when controls are relied on, and substantive procedures for every material class of transactions, balances and disclosures.
- Update the audit plan as evidence emerges; planning is continuous, not a one-off stage.
Evidence and sampling
- Sufficient appropriate evidence is obtained from inspection, observation, inquiry, confirmation, recalculation, reperformance and analytical procedures.
- External confirmations are stronger than internal evidence; documentary evidence is stronger than oral.
- Sampling risk and non-sampling risk must be controlled; the auditor projects misstatements found in a sample to the population.
Worked example
Inherent risk is assessed at 60% and control risk at 50%. The auditor sets detection risk at 20% to keep audit risk at an acceptable level. Audit risk = 0.60 × 0.50 × 0.20 = 6%. If the auditor decides that 6% is still too high, detection risk must fall, for example to 10%, giving 3%. A lower detection risk requires more reliable and extensive substantive procedures, not a change in the client's inherent or control risk.
Traps that cost marks
- Treating detection risk as fixed or as a client responsibility.
- Relying on controls without testing their operating effectiveness.
- Confusing materiality with performance materiality or with tolerable misstatement.
- Issuing an unmodified opinion when a material uncertainty about going concern is inadequately disclosed.
- Using the wrong modification: qualified for material but not pervasive; adverse for material and pervasive; disclaimer when unable to obtain evidence that is material and pervasive.