Assess Specific Risks :
The auditors should identify and assess the risks of material misstatement at the financial statement level which refers to risks that relate pervasively to the financial statements as a whole, and potentially affect many assertions. Risk of material misstatement at the assertion level for specific class of transactions, account balances and disclosures need to be considered because such consideration directly assists in determining the nature, timing and extent of further audit procedures at the assertion level necessary to obtain sufficient appropriate audit evidence.
For this purpose, the auditor should perform the following:
Identify risks throughout the process of obtaining an understanding of the bank and its environment, including applicable controls that relate to the risks, and by considering the account balances or disclosures in the financial statements.
Ascertain account balances or disclosures wherein control lapses or errors have been identified in the past.
Pinpoint each risk to one or more assertions relating to the account balances or disclosures.
Consider whether the risks are of a magnitude that could result in a material misstatement of the financial statements.
Document the identified and assessed risks of material misstatement at the assertion level.
Although there is always a risk of misstatement for each significant account balance and disclosure, a specific risk exists when the auditor recognises one or more factors that significantly increases the risk of material misstatement. This assessment is based on the nature of the risk, the likelihood of the occurrence of the risk, and the likely magnitude of any resulting misstatements.
The identification of specific risks, which arise on most audits, is a matter of professional judgment. The factors influencing the identification of specific risks may include the following:
past misstatements strongly indicate about the likely occurrence of future misstatements;
the application systems are unreliable;
non-systematically processed transactions have a disproportionately higher likelihood of misstatement than those routine transactions that are processed by reliable application systems;
absence of secondary review;
the incidence of misstatements is greater in transactions relating to accounting estimates and adjustments at or near to the end of an accounting period (i.e., cut-offs and accruals); and
the incidence of misstatements associated with unusual or complex transactions.
The greater the likelihood that the risk could result in a material misstatement of the financial statements, the greater the potential for that risk of material misstatement to be assessed as a specific risk.
The auditor’s assessment of the risks of material misstatement at the assertion level is based on available audit evidence which may change during
the course of the audit as and when further audit evidence is obtained indicating the change in the previously obtained audit evidence (e.g., when performing substantive procedures, the auditor may detect misstatements in amounts or frequency greater than that of consistent with their risk assessment). In these circumstances, the auditor needs to consider whether it is appropriate to revise the risk assessment procedures and modify the further planned audit procedures accordingly. The auditor is required to document the identified and assessed risks of material misstatement at the assertion level.
Most transactions involve more than one type of the risk identified, as mentioned in the Annexure-1 to this Chapter. Furthermore, the individual risks set out above may be correlated with one another. For example, a bank’s credit exposure in a securities transaction may increase as a result of an increase in the market price of the securities concerned. Similarly, non-payment or settlement failure can have consequences for a bank’s liquidity position. The auditor therefore considers these and other risk correlations when analysing the risks to which a bank is exposed.