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If a company is large and is assumed that it has strong controls, a business risk approach is taken.
For smaller companies it is less likely that the auditor will rely on its controls, thus a detailed substantive approach may be more appropriate.
Does this imply that audit risk approach should be taken to focus on the detailed audit tests on areas where problems are most likely to arise?
Hi, it depends what you mean by detailed audit tests. In a system with no controls (or no auditable controls or even only just weak controls) the auditors initial assessment will push them to adopting a balance sheet approach and in particular a risk-based balance sheet approach.
It you can materially confirm the figures on the balance sheet, then the “missing” figure is retained earnings. Ok, the sub-analysis on the profit or loss account may be flexible (incorrect) but the bottom line should be ok because that’s what makes the balance sheet balance
I think that answers your question but, if not, post again
🙂
thanks mike. There is also one question in the P7 Forum that Romes asked about customer due diligence if you can have a look 🙂
Hi JS
Maybe you could direct Romes to copy and paste the question onto the Ask the Tutor page
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