AWP risk response

​ase Example: ABC Manufacturing Company

Context

ABC Manufacturing Company operates in the highly competitive and rapidly changing electronic components industry. The company faces various risks, including those related to inventory valuation, revenue recognition, and compliance with international financial reporting standards (IFRS).

Audit Objective

To identify significant risks affecting ABC Manufacturing Company’s financial statements and design audit responses that appropriately address these risks to obtain reasonable assurance about whether the financial statements are free of material misstatement.

Types of Audit Evidence and Documentation for Risk and Response

1. Identification of Significant Risks

• Case: Through understanding the company’s environment, operations, and internal control, identify significant risks, such as inventory obsolescence, revenue recognition under IFRS 15, and foreign currency transactions.

• Documentation: Prepare a risk assessment document listing identified risks, their causes, and how they might impact the financial statements. Include the rationale for classifying risks as significant.

2. Linking Risks to Financial Statement Assertions

• Case: For each significant risk, link it to related financial statement assertions such as completeness, accuracy, valuation, and rights and obligations.

• Documentation: Create a matrix that maps significant risks to the affected assertions in the financial statements, providing a basis for focusing audit efforts on the most relevant assertions.

3. Designing Audit Responses

• Case: Design specific audit procedures tailored to address the identified significant risks. This may include substantive procedures, enhanced scrutiny of journal entries, or testing the effectiveness of controls over revenue recognition.

• Documentation: Document the planned audit procedures for each significant risk, including the nature, timing, and extent of procedures to be performed. Detail how these procedures are expected to mitigate the risks identified.

4. Assessment of IT Systems and Controls

• Case: Given the reliance on IT systems for processing financial transactions, assess the IT controls relevant to financial reporting and identify any IT-related risks, such as data integrity issues.

• Documentation: Summarize the assessment of IT controls, identifying any weaknesses and the corresponding audit responses, such as increased substantive testing or reliance on expert evaluations of IT systems.

5. Consideration of Fraud Risk

• Case: Evaluate the company’s exposure to fraud risk, including fraudulent financial reporting and misappropriation of assets.

• Documentation: Document the discussions with management and the audit team regarding fraud risk, the indicators of fraud risk identified, and the specific audit responses designed to address the risk of fraud.

6. Evaluation of Going Concern Assumption

• Case: Assess the company’s ability to continue as a going concern, considering factors like liquidity issues, debt covenants, and market conditions.

• Documentation: Document the analysis of going concern risk, including any mitigating factors, management’s plans, and the auditor’s conclusion on the company’s ability to continue in operation for the foreseeable future.

7. Communications with Those Charged with Governance

• Case: Communicate significant risks and the planned audit responses to the company’s audit committee or equivalent governance body.

• Documentation: Prepare a report or minutes of the meeting detailing the significant risks discussed, audit responses, and any concerns or recommendations provided by those charged with governance.

Conclusion

For risk and response, auditors systematically identify and assess risks of material misstatement in ABC Manufacturing Company’s financial statements and design tailored audit procedures to address these risks effectively. Through detailed documentation, auditors provide a transparent record of the audit planning process, ensuring that audit efforts are focused where they are most needed. This rigorous approach enhances the quality and effectiveness of the audit, providing reasonable assurance that the financial statements are free from material misstatement.