Discuss any gaining an understanding of the client is crucial to the risk assessment process.

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Discuss any gaining an understanding of the client is crucial to the risk assessment process. Please address the different levels which need to be considered by the auditor and give appropriate examples in your response.


ASA 200 requires an auditor to possess a professional judgement in performing audit. Auditor is requires to keep scepticism in identifying circumstances believing that financial report may include material misstatement.  Auditor is required to get the sufficient information of the client to give reasonable assurance if any material misstatement, fraud or error is present before designing the procedure of audit. Auditor should obtain a good understanding on the Company and environment around to understand the events, conditions and activities of Company which can significantly impact the risk of material misstatement. The recognition of risk of material misstatement due to error and fraud at assertion level provide a base to design and implement the responses in relation to ascertained risk of material misstatement.

Audit risk can be divided into inherent risk, control and detection risk. ISA315 required auditor to understand the client in terms of environment and applicable standards of financial reporting and internal controls. The inherent risks will require auditor to understand the environment of and applicable financial reporting framework and control risk will require an understanding of the internal control system. Inherent factors can be divided in terms of complexity, subjectivity and change. Inherent risk will determine the susceptibility of assertion by categorising the transaction, balance of account and material disclosure of misstatement both individually and also aggregated with other misstatements before taking into account any associated controls. Complexity in inherent risks takes place when the accounting and reporting is complex such as auditing of multinational insurance Company. The subjectivity factor will arise when choice is to be made between base of estimations of accounting and valuation methodology. The change factor takes place for change in geographical expansion and customer change. Uncertainty factor arise when company is having any legal case pending. The susceptibility factor can also take place when management is failed while maintaining neutrality such as adjustments of bonus schemes. Similarly control risk has many factors such as control environment, monitoring process of entity, information system and communications and control activities. Auditor understanding of these components affects the risk of material misstatement. The last element is of risk model is detection risk where auditor reduce the risk to acceptable level and fail to detect material misstatement.

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