Referance

[300]

Accounting and internal control systems and

audit risk assessments

(Issued March 1995)

Contents

Paragraphs

Introduction

1–12

Inherent risk

13–15

Accounting system and control environment

16–23

Internal controls and their inherent limitations

24–25

Control risk in the small business

26

Control risk

27–48

Detection risk

49–56

Communication of weaknesses

Compliance with International Standards on Auditing

Effective date

57

58–59

60

157

Accounting and internal control systems and audit risk

assessments

Statements of Auditing Standards (‘SASs’) are to be read in the light of ‘The scope and

authority of APB pronouncements’. In particular, they contain basic principles and

essential procedures (‘Auditing Standards’), indicated by paragraphs in bold type,

with which auditors are required to comply in the conduct of any audit. SASs also

include explanatory and other material which is designed to assist auditors in

interpreting and applying Auditing Standards. The definitions in the Glossary of terms

are to be applied in the interpretation of SASs.

Introduction

The purpose of this SAS is to establish standards and provide guidance on audit risk

and its components: inherent risk, control risk and detection risk, and also on the

auditors’ approach to obtaining an understanding of the accounting and internal

control systems. In some circumstances specific legislation and regulations require

auditors to undertake procedures additional to those set out in this SAS.

1

Auditors should:

2

(a) obtain an understanding of the accounting and internal control systems

sufficient to plan the audit and develop an effective audit approach; and

(b) use professional judgment to assess the components of audit risk and to design

audit procedures to ensure it is reduced to an acceptably low level. (SAS

300.1)

‘Audit risk’ means the risk that auditors may give an inappropriate audit opinion on

financial statements. Audit risk has three components: inherent risk, control...