I SAP 6 ( REVISED ) RISK ASSESSMENTS & INTERNAL CONTROL

Summary of SAP

Types of Audit Risk and process/factors to evaluate that: 1) Inherent Risk 2) Control Risk 3) Detection Risk

1) Inherent Risk

Use professional Judgment.

Factors to be considered

I. At Financial Statement level :
1. Management Integrity
2. Experience & Knowledge of Management
3. Changes in Management
4. Unusual Pressure on Management
5. Nature of business
6. Factor affecting Industry

II. At Transaction Level :
1. Quality of accounting System.
2. FS are likely to be susceptible to misstatement.
3. Requirement of work of an expert due to complexity of transactions.
4. Degree of judgement involved.
5 Susceptibility of assets to loss or misappropriation.
6. Completion of unusual and complex transactions.
7. Transactions not subjected to ordinary processing.

2) Control Risk
1. Obtain understanding of accounting system or document it.
2. Obtain understanding of Internal control system or documentation it.
3. Preliminary assessment of control Risk.
4. Identify Internal control relevant to the assessment, which are likely to prevent or detect and correct a material misstatement.
5. Plan to perform to test of control to support the assessment.
6. Documentation assessment of control risk if assessment at less than higher.

Test of Control
1. Inspection of documents to gain audit evidence that internal control have operated properly.
2. Inquiries and observation of Internal Control.
3. Re-performance of Internal Control .
4. Test of Internal Control operation on computerised application.
5. Ensure IC were in use throughout the period.
6. Auditor can perform some test of control during an enterim visit but consider need to obtain further evidence based on certain factors like results of the enterim tests, length of remains period, changes occurred during the remaining period, nature and amount of the transactions in remaining period etc.

3) Detection Risk
1. Detection Risk related to substantive procedures.
2. Substantive procedures is influenced by Inherent Risk (IR) / Control Risk(CR)
3. Regardless of level of IR/ CR. Some substantive procedure for material account are to be performed.
4. Some DR will always be present even if auditor examing 100% transactions as an evaluation is persuasive rather than conclusive.
5. Higher IR / CR obtain more evidence from performance of substantive procedures.
6. If DR can not be reduced to acceptable level issue qualified opinion or disclaimer.

>> If assessment results that IR is not high, document the reasons for such assessment.

Inherent Risk and Control Risk are highly interrelated combine assessment can be made.

Audit Risk in the Small Business

In circumstances where segregation of duties is limited and audit evidence of supervisory control is lacking, obtain audit evidence entirely through substantive procedures.

Communication of weaknesses

Communicate weakness to the management as soon as practical.

Final assessment of control risk.

Assessment of control risk is confirmed?
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If no Make specific inquiries?
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To Consider Implication
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Amend Preliminary assessment by
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Modify the nature, timing and extent of substantive procedure
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Or obtain evidence for other tests of control to support preliminary assessment

II General Clarifications on Accounting Standards

It has been decided that the clarification issued on Accounting Standard from 2002 onwards should be numbered in chronological order year-wise, Clarification (GC) - 1/2002 and Clarification (GC) - 2/2002 etc.

General Clarification (GC) - 3/2002

Clarification on Disclosure of Revenue from Sales Transactions as per Accounting Standard 9, Revenue Recognition

With a view to bring about uniformity, it is recommended that the amount of turnover be disclosed in the following manner on the face of the statement of profit and loss:

Turnover (Gross)      XX
Less: Excise Duty    XX
                                _____
Turnover (Net)          XX

General Clarification (GC) - 4/2002

In Accounting Standard 14, Accounting for Amalgamations, Issue on treatment of reserves specified in a scheme of Amalgamation has been clarified as:

In some cases, the scheme of amalgamation sanctioned under a statute prescribes a different treatment to be given to the reserves of the transferor company after amalgamation as compared to the requirements of AS 14 that would have been followed had no treatment been prescribed by the scheme. In such cases, in the interest of better understanding, it is recommended that the following disclosures be made in the first financial statements following the amalgamation:

1. A description of the accounting treatment given to the reserves and the reasons for following a treatment different from that prescribed in AS 14.

2. Deviation in the accounting treatment given to the reserves as prescribed by the scheme of amalgamation sanctioned under the statute as compared to the requirements of AS 14 that would have been followed had no treatment been prescribed by the scheme.

General Clarification (GC) - 5/2002 on AS 21.

It is clarified that for preparing consolidated financial statements, the following principles should be observed in respect of notes and other explanatory material that form an integral part thereof :

(i) Notes which are necessary for presenting a true and fair view of the consolidated financial statements should be included in the financial statements as an integral part thereof.

(ii) Only the notes involving items which are material need to be disclosed.

(iii) Additional statutory information disclosed in separate financial statements of the subsidiary and/or a parent having no bearing on the true and fair view of the consolidated financial statements need not be disclosed in the consolidated financial statements.

ICAI has issued AS 28 on Impairment of assets and Guidance Note on Accounting for equity index options and equity stock options and Revised SAP 10 on using the work of Another Auditor will be covered in the coming issue of News and Views.

Attention Students : In view of the change in syllabus and registration procedure for C.A. Course, a student on getting registration for PE II examination, will be eligible to apply as a "student associate" of our association for a maximum period of 5 years.