SAS No. 48 IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT     

Status

Issued by Auditing Standards Committee in Taiwan on 15 November, 2010

Summary

This Statement deals with the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements, through understanding the entity and its environment, including the entity’s internal control.

The auditor shall perform risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels. The risk assessment procedures which are the audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement at the financial statement and assertion levels shall include the following:

  • Inquiries of management and of others within the entity who in the auditor’s judgment may have information that is likely to assist in identifying risks of material misstatement due to fraud or error.
  • Analytical procedures.
  • Observation and inspection.

The engagement partner and other key engagement team members shall discuss the susceptibility of the entity’s financial statements to material misstatement, and the application of the applicable financial reporting framework to the entity’s facts and circumstances. The engagement partner shall determine which matters are to be communicated to engagement team members not involved in the discussion.

The auditor shall obtain an understanding of the entity and its environment such as the nature of the entity, the entity’s selection and application of accounting policies, and relevant industry, regulatory, and other external factors.

The auditor shall obtain an understanding of internal control relevant to the audit. When obtaining an understanding of controls that are relevant to the audit, the auditor shall evaluate the design of those controls and determine whether they have been implemented, by performing procedures in addition to inquiry of the entity’s personnel.

The auditor shall:

  • Identify risks throughout the process of obtaining an understanding of the entity and its environment, including relevant controls that relate to the risks, and by considering the classes of transactions, account balances, and disclosures in the financial statements;
  • Assess the identified risks, and evaluate whether they relate more pervasively to the financial statements as a whole and potentially affect many assertions;
  • Relate the identified risks to what can go wrong at the assertion level, taking account of relevant controls that the auditor intends to test; and
  • Consider the likelihood of misstatement, including the possibility of multiple misstatements, and whether the potential misstatement is of a magnitude that could result in a material misstatement

to identify and assess the risks of material misstatement.

The auditor shall determine whether any of the risks identified are, in the auditor’s judgment, a significant risk. If the auditor has determined that a significant risk exists, the auditor shall obtain an understanding of the entity’s controls, including control activities, relevant to that risk. Besides, in respect of some risks, the auditor may judge that it is not possible or practicable to obtain sufficient appropriate audit evidence only from substantive procedures. In such cases, the entity’s controls over such risks are relevant to the audit and the auditor shall obtain an understanding of them.

Effective date

This Statement is effective from 1 January, 2012.

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