ACCY 405 Chap.9 Planning Risk Assessments
Planning Risk Assessments
Planning inside a recursive workflow
The KPMG monograph shows the audit as a unified whole in four phases: planning, control evaluation, substantive testing and completion. One cumulative, recursive risk assessment runs through them, so a later finding can reopen an earlier conclusion.
Planning often starts in the first half of the client's year, before the year-end figures exist, and ends with a preliminary choice between relying on controls and a substantive approach for each objective.
Fraud and error, at three levels
Planning assesses the risk of material weakness and of material misstatement separately for fraud and error, because fraud involves concealment that error-oriented procedures may not address.
Assessments are made for the statements as a whole, for classes and balances, and for assertions.
Pervasive risks at the top level come from going-concern threats, incentives and pressures toward fraud, and weaknesses in the control environment.
What planning identifies
Planning names the components that need further work: significant routine classes of transactions, significant unusual transactions, estimates and judgemental valuations, other balances with elevated risk, and matters that may need disclosure.
Responses to pervasive risks include more experienced staff, specialists, more evidence from the business, and procedures the client cannot predict.
Indicators as attention-directing tests
Financial key performance indicators are tested for reasonableness as attention-directing procedures.
A comparison with last year is incomplete on its own; the auditor predicts how accounts should move and investigates both unexpected changes and missing expected ones, using checks such as capacity against units sold and budgets that were set as stretch goals.
Reading the business before the numbers
Planning evidence covers the industry and regulatory environment, the entity's objectives and strategy, its ownership and governance, its accounting policies and internal audit, and management's own indicators such as budgets and segment reports.
The monograph's point is that these feed one mental model of the entity rather than a separate assessment for each item monitored.
What this chapter covers
- 01
Four phases and one recursive assessment
- 02
Controls or substantive: the preliminary choice
- 03
Fraud and error at three levels
- 04
Pervasive risks and overall responses
- 05
Components planning identifies
- 06
Indicator reasonableness tests
- 07
Stretch budgets and fraud pressure
Worked example · free
Spot a missing fluctuation
- 2State the expected pattern from the business.
- 2Explain why the absence of change is a signal.
- 2Plan a response for the assertions at risk.
Key terms
- Audit Workflow
- The four phases of planning, control evaluation, substantive testing and completion, linked by one recursive risk assessment.
- Risk of Material Weakness
- The risk that internal control has a deficiency serious enough to be a material weakness.
- Pervasive Risk
- A risk at the level of the statements as a whole, such as a going-concern threat or a weak control environment.
- Significant Account
- An account with more than a remote likelihood of misstatement that could be material alone or in aggregate.
- Attention-Directing Procedure
- An analysis that flags elevated risk without the precision needed to substantiate a balance.
Planning Risk Assessments FAQ
Why is fraud risk assessed separately from error at planning?
Fraud involves concealment and intent, so procedures designed to catch honest mistakes may miss it. Separating the two lets the auditor plan responses, such as unpredictable procedures, aimed specifically at fraud.
Why is a comparison with last year not enough?
It assumes last year's figures are a valid expectation. If the business changed, the right expectation changed too, and a figure that matches last year may itself be the anomaly.
What does recursive mean for planning?
Planning conclusions are provisional. Evidence from control evaluation, substantive testing or completion can reopen them, and an error made at planning can weaken every later phase unless it is caught.
How do stretch budgets affect audit risk?
A budget set as a stretch goal, especially one shared with analysts, creates pressure to report results that meet it, which the monograph links to elevated fraud risk.
Exam move
For a company you know, list three indicators you would test at planning and write the direction you expect each to move this year and why. Then name the assertion you would worry about if it did not.
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