Hello Swati, Here is your answer, **Q. No. 01 What are the points to be remembered while evaluating the knowledge of the business in the conduct of an audit?** **Ans**. The Broad matters to be considered while obtaining knowledge of business for a new audit assignment are set out in SA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its environment. 1. Relevant industry, regulatory, economic and other external factors including the applicable financial reporting framework 2. The nature of the entity, including: (a) Its operations; (b) Its ownership and governance structures; (c) The types of investments that the entity is making and plans to make, including investments in special-purpose entities; and (d) The way that the entity is structured and how it is financed; to enable the auditor to understand the classes of transactions, account balances, and disclosures to be expected in the financial statements. 3. The entity's selection and application of accounting policies. 4. The entity's objectives and strategies, and those related business risks that may result in risks of material misstatement. 5. The measurement and review of the entity's financial performance ............................................................................ **Que. Auditor is required to identify and assess Risk of material misstatement through understanding the entity and its environment. Explain the various matters of which auditor should obtain understanding.** **Ans**. Considerations of Auditor for Assessing the Risk of Material Misstatement: As per SA 315 “Identifying and Assessing the Risk of Material Misstatement through understanding the Entity and its Environment”, the auditor shall identify and assess the risks of material misstatement at the financial statement level; and the assertion level for classes of transactions, account balances, and disclosures to provide a basis for designing and performing further audit procedures. For this purpose, the auditor shall: 1) 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; 2) 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 3) 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. ................................................................................... **2. write a short note on risk assessment procedures?** **Ans**. SA 315/330-The risk assessment procedure shall include the following: (i) 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. (ii) Analytical procedures. (iii) Observation and inspection. ....................................................................... **3. explain various components of internal control?** **Ans**. its components are **1. CONTROL ENVIRONMENT** Control environment is the attitude toward internal control and control consciousness established and maintained by the management and the employees of an organization. It is a product of management's philosophy, style and supportive attitude, as well as the competence, ethical values, integrity, and morale of the organization's people. The organization structure and accountability relationships are key factors in the control environment. Elements of the Control Environment - Ethical Values and Integrity - Management’s Operating Style and Philosophy - Competence - Morale - Supportive Attitude - Mission - Structure **2. COMMUNICATION** Communication is the exchange of useful information between and among people and organizations to support decisions and coordinate activities. Within an organization, information should be communicated to management and other employees who need it in a form and within a time frame that helps them to carry out their responsibilities. Communication also takes place with outside parties such as customers, suppliers and regulators. Elements of Communication - Timeliness - Sufficient but not excessive detail - Appropriate to user - Clear and open horizontal and vertical **3. ASSESSING AND MANAGING RISK** Risks are events that threaten the accomplishment of objectives. They ultimately impact an organization's ability to accomplish its mission. Risk assessment is the process of identifying, evaluating and determining how to manage these events. At every level within an organization there are both internal and external risks that could prevent the accomplishment of established objectives. Ideally, management should seek to prevent these risks. However, sometimes management cannot prevent the risk from occurring. In such cases, management should decide whether to accept the risk, reduce the risk to acceptable levels, or avoid the risk. To have reasonable assurance that the organization will achieve its objectives, management should ensure each risk is assessed and handled properly. ....................................................................... **Q. No. 1 While planning the audit of X Ltd, you want to apply sampling techniques. What are the risk factors you should keep in mind.** **Ans**. Risk Factors while applying sampling techniques: As per SA 530 “Audit Sampling”, sampling risk is the risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous conclusions- (i) In the case of a test of controls, that controls are more effective than they actually are, or in the case of tests of details, that a material misstatement does not exists when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion. (ii)In the case of test of controls, the controls are less effective than they actually are, or in the case of tests of details, that a material misstatements exists when in fact it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect. ............................................................... **Q. No. 1 While auditing X Ltd, you observe certain material financial statement assertions have been based on estimates made by the management. As an auditor how do you identify and assess risk of material misstatement** **Ans**. As per SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures”, the auditor shall obtain an understanding of the following in order to provide a basis for the identification and assessment of the risks of material misstatements for accounting estimates: (1)The requirements of the applicable financial reporting framework relevant to the accounting estimates, including related disclosures. (2)How Management identifies those transactions, events and conditions that may give rise to the need for accounting estimates to be recognised or disclosed, in the financial statements. In obtaining this understanding, the auditor shall make inquiries of management about changes in circumstances that may give rise to new, or the need to revise existing, accounting estimates. (3)The estimation making process adopted by the management including- a) The method, including where applicable the model, used in making the accounting estimates. b) Relevant controls. c) Whether management has used an expert? d) The assumption underlying the accounting estimates. e) Whether there has been or ought to have been a change from the prior period in the methods for making the accounting estimates, and if so, why; and f) Whether and, if so, how the management has assessed the effect of estimation uncertainty. Thanks & Regards