Significant lapses in an audit of financial statements identified by NFRA

Risk of material misstatement is the risk that financial statements are materially misstated prior to the audit. SA 315 states that the auditor shall perform risk assessment procedures to provide a basis for the identification and assessment of the risk of material misstatement at the financial statement level and assertion levels.

For an effective risk assessment, it is essential that the engagement partner and engagement team discuss the susceptibility of the entity’s financial statements to material misstatement, and the application of the applicable financial reporting framework to the entity’s facts and circumstances.

But during the examination of audit documentation of the auditor, the following instances of lapses were found by NFRA:

a) Failure to identify and assess the risks of material misstatement through understanding the entity and its environment, including the entity’s internal control.

b) Failure to exercise professional skepticism, professional competence, and due care.

c) Failure to document significant matters arising during the audit, and the conclusions reached thereon.

d) Failure to document the significant professional judgments made in reaching the conclusions.

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