ABSTRACT
Introduction In previous chapters, we discussed how understanding an organization’s strategic position, plans, risks, controls, and processes are critical for the performance of an e ective audit of nancial statements. After carrying out the strategic and process analysis, including tests of controls where controls will be relied upon (or mandatory tests in the Integrated Audit), the auditor possesses a substantial set of evidence about conditions within the organization and has identi ed strategic risks, process risks, and any signi cant de ciencies in internal control over nancial reporting that are relevant to the nancial statement audit. The internal controls over nancial reporting provide indirect evidence about management’s assertions and represents evidence on how well processes, especially nancial controls, reduce the risks of material misstatement. In this chapter, we link our previous risk analysis directly to the auditor’s tests of the management assertions that comprise the nancial statements (Figure 10.1). In essence, information gathered during the knowledge acquisition and risk assessment stage of the audit provides an informed view about client business and audit risks, especially about the risk of material misstatement. Any signi cant risk that remains at this point in the audit is referred to as residual risk. At this stage, the auditor will assess whether these residual risks have any implications for the risk of material misstatement in the nancial statements.
