The auditor may obtain this level of assurance by performing audit procedures. The audit procedures to be performed are designed in the light of size and complexity of the entity. These are also affected by the auditor’s assessment of the risk of material misstatement and the auditor focuses on the areas where the risk of material misstatement may be present. The risk of material misstatement is the function of the inherent risk and the control risk. Inherent risk is defined as the susceptibility of financial statements and assertions therein to misstatements which are material in the context of the financial statements. On the other hand, control risk is defined as a risk that the financial statements and assertion therein may susceptible to a material misstatement which are not prevented, or remain undetected and uncorrected by the internal controls of the entity. To respond to the assessed control risks, the auditor performs test of controls. The understanding of the designed suitability and functioning of the internal controls helps the auditor in responding to those risks. It also helps the auditor to obtain reasonable assurance that the entity is achieving the financial reporting objectives. Thus, to assess the risk of material misstatement at overall financial statements level and at assertion level, it is essential for the auditor to obtain an understanding of the internal controls of the entity.
Internal control is defined as a process designed to provide the auditor, whether internal or external to the firm, with a reasonable assurance that the company is achieving its objectives. The internal controls are affected by management, those charged with governance and other personnel of the entity. ...Show more