Auditing
procedures may be used by the auditor as audit
Chapter 10
UNDERSTANDING THE ENTITY AND
ITS ENVIRONMENT
PHASE I-C “PERFORMANCE OF RISK
ASSESSMENT PROCEDURES TO IDENTIFY /
ASSESS RISK OF MATERIA; MISSTATEMENT
THROUGH UNDERSTANDING THE ENTITY “
PSA 315 (Clarified) deals with the auditor’s
responsibility to identify and assess the risk
of material misstatement of the entity and
its environment, including its internal
control.
I. Risk assessment procedures and
sources of information about the
entity and its environment,
including its internal control.
II. Understanding the entity and its
environment, including its
internal control.
III. Identifying and assessing of the
risks of material misstatements.
IV. Material weakness in internal
control
V. Documentation
I. Risk Assessment Procedures and
Sources of Information about the
Entity and Its Environment, Including
Its Internal Control.
As described in PSA 500, audit procedures to
obtain an understanding are referred to as “risk
assessment procedures “because some of the
information obtained by performing such  Inquiries of employees involved in
initiating, processing or recording complex
evidence to support assessment of the risks of or unusual transactions may help the auditor
in evaluating the appropriateness of the
material misstatement. In addition, in
selection and application of certain
performing risk assessment procedures, the accounting policies.
auditor as audit evidence about classes of  Inquiries directed toward in-house legal
transactions, account balances, or disclosures counsel may relate to such matters as
and related assertions and about the operating litigation, compliance with laws and
effectiveness of controls, even though such regulations, knowledge of fraud or suspected
fraud affecting the entity, warranties, post-
audit procedures were not specifically planned
sales obligations arrangements (such as joint
as substantive procedures or as tests of ventures) with business partners and the
controls. meaning of contract terms.
 Inquiries directed towards marketing or
RISK ASSESSMENT PROCEDURES sales personnel may relate to changes in the
entity’s marketing strategies, sales trends, or
a. Inquiries of management and others
contractual arrangements with its customers.
within entity:
b. Analytical procedures; and Analytical Procedures – may be helpful in
c. Observation and inspections. identifying the existence of unusual transaction
or events and amounts, ratios, and trends that
Inquiries – the auditor may consider making
might indicate matters that have financial
inquiries of the entity’s external legal counsel or
statement and audit implications. In performing
of valuation experts that the entity has used.
Reviewing information obtained from external
sources such as reports by analyst, banks, or
rating agencies; trade and economic journals; or
regulatory or financial publications may also be
useful in obtaining information about the entity.
 Inquiries directed towards those charged
with governance may help the auditor
understand the environment in which the
financial statement are prepared.
 Inquiries directed toward the internal audit
personnel may relate to their activities
concerning the design and effectiveness of
the entity’s internal control and whether
management has satisfactorily responded to
any findings from these activities.