What kind of information should CPA consider to help him identify and evaluate the risk of material misstatement?

I. risk assessment procedures and sources of information

1. Ask the management and other personnel of the audited unit. Asking the management and other personnel inside the audited entity is important information for certified public accountants to understand the audited entity and its environment Mi Yuan. A certified public accountant may consider asking the management and the person in charge of finance the following matters:

(1) Major issues of concern to management. Such as the loss of new competitors, major customers and suppliers, the implementation of new tax regulations, changes in business objectives or strategies, etc.

(2) the recent financial status, operating results and cash flow of the audited entity.

(three) transactions and events that may affect the financial report, or major accounting problems that have occurred at present. Such as major mergers and acquisitions.

(four) other important changes in the audited entity. Such as changes in ownership structure, organizational structure and internal control.

Most of the information obtained by CPA through inquiry comes from management and personnel in charge of financial reporting. Certified public accountants can also obtain information by asking other people at different levels within the audited entity, or provide different perspectives for identifying the risk of material misstatement. For example:

(1) directly asking the management may help certified public accountants to understand the environment for preparing financial statements;

(2) Directly asking the internal auditors may help to obtain the following information: the internal audit procedures implemented this year for the effectiveness of the internal control design and operation of the audited entity, and whether the management has taken appropriate measures according to the results of implementing these procedures;

(3) Asking employees involved in generating, handling or recording complex or abnormal transactions may help certified public accountants to evaluate the appropriateness of the auditee's selection and application of accounting policies;

(4) directly asking internal legal counsel may help certified public accountants to understand relevant information, such as litigation, compliance with laws and regulations, fraud or suspected fraud affecting the audited entity, product warranty, after-sales responsibility, arrangements with business partners (such as joint ventures) and the meaning of contract terms;

(5) directly asking marketing or sales personnel may help certified public accountants to understand the changes in the marketing strategy, sales trend or contract arrangement with customers of the audited entity.

2. Implement analysis procedures. Analysis program means that certified public accountants evaluate financial information by studying the internal relations between different financial data and between financial data and non-financial data. The analysis program also includes fluctuations and relationships that are inconsistent with other relevant information or seriously deviate from the expected data determined through investigation.

Analysis procedures can be used as risk assessment procedures and substantive procedures, and can also be used for the overall review of financial statements. Certified public accountants' execution of analysis procedures helps to identify abnormal transactions or events, as well as the amount, ratio and trend that have an impact on financial statements and audits. When implementing the analysis procedure, the certified public accountant shall anticipate the possible reasonable relationship, compare it with the amount recorded by the audited entity, and calculate the ratio or trend according to the recorded amount; If abnormal or unexpected relationships are found, certified public accountants should consider these comparison results when identifying the risk of material misstatement.

If highly summarized data are used, the results of implementing the analysis program may only initially show that there are significant misstatements in the financial statements. When identifying the risk of material misstatement, considering the results of the analysis program together with other information obtained can help certified public accountants understand and evaluate the results of the analysis program. For example, the audited entity has many product lines, and the gross profit margin of each product line is different. The results of analyzing the overall gross profit margin may only show that there is a major misstatement in the cost of sales, and certified public accountants need to implement more detailed analysis procedures. For example, analyze the gross profit margin of each product series, or consider the results of the overall gross profit margin analysis together with other information.

3. Observation and inspection. Observation and inspection procedures can support the inquiry results of management and other relevant personnel, and can provide information about the audited entity and its environment. A certified public accountant shall implement the following observation and inspection procedures:

(1) Observe the business activities of the audited entity. For example, observe the production activities and internal control activities of the staff of the audited unit, and increase the CPA's understanding of the production and operation activities and internal control of the staff of the audited unit.

(2) Check documents, records and internal control manuals. For example, check the business plan, strategy and articles of association of the audited entity, contracts and agreements signed with other entities, operation guides and internal control manuals of various business processes, etc. To understand the establishment and improvement of the organizational structure and internal control system of the audited entity.

(3) Read the reports prepared by management and governance institutions. For example, read the annual and interim financial reports of the audited entity,

Minutes or minutes of shareholders' general meeting, board meeting and senior management meeting, management discussion and analysis materials, evaluation of important business links and external factors, internal management report of the audited entity and other special reports (such as feasibility analysis report of new investment projects), etc. To understand the major events that occurred during the period from the end of the last audit to this audit.

(four) on-site inspection of the production and business premises and plant equipment of the audited entity. On-the-spot visit and on-the-spot inspection of the production and business premises and plant equipment of the audited entity can help certified public accountants to understand the nature and business activities of the audited entity. In the process of on-the-spot inspection of the factory and office of the audited entity, the CPA has the opportunity to communicate with the management of the audited entity and employees with different responsibilities, which can enhance the CPA's understanding of the business activities of the audited entity and its main influencing factors.

(5) Tracking the transaction processing process (walk-through test) in the financial reporting information system. This is an audit procedure often used by certified public accountants to understand the business process of the audited entity and its related controls. By tracking the generation, recording, processing and reporting of one or more transactions in the business process, and the implementation of related controls, certified public accountants can determine whether the transaction process and related controls of the audited entity are consistent with the previous knowledge obtained through other procedures, and whether the related controls are implemented.

Two. Other audit procedures and sources of information

1. Other audit procedures. In addition to using the above procedures to obtain information from the inside of the audited entity, if the information obtained from the outside of the audited entity is helpful to identify the risk of material misstatement according to professional judgment, the certified public accountant shall implement other auditing procedures to obtain the information. For example, ask the external legal consultant, professional appraiser, investment consultant and financial consultant hired by the audited entity.

Reading external information may also help certified public accountants to understand the audited entity and its environment. External information includes reports issued by securities analysts, banks and rating agencies on the economic or market environment of the audited entity and its industry, newspapers, regulations or financial publications related to economy and trade, and industry reports and statistical data issued by government departments or non-governmental organizations.

2. Other sources of information. Certified public accountants should consider whether the information obtained in the process of customer acceptance or retention is related to identifying the risk of material misstatement. Usually, for new audit business, certified public accountants should have a preliminary understanding of the audited entity and its environment in the business undertaking stage to determine whether to undertake the business. For the continuous audit business, the audit of the previous year should also be evaluated as a whole during the annual renewal process, and the understanding of the audited entity and the risk assessment results should be updated to determine whether to renew the insurance. Certified public accountants should also consider whether the experience gained from providing other services to the audited entity (such as reviewing interim financial statements) is helpful to identify the risk of material misstatement.

For the continuous audit business, if you intend to use the information obtained from previous contact with the audited entity and the implementation of the audit procedure in the previous audit, the certified public accountant should determine whether the audited entity and its environment have changed since the last audit, which may further affect the relevance of these information to this audit. For example, the audit evidence about the organizational structure, production and operation activities and internal control of the audited entity obtained through the previous audit, as well as the information about whether the previous misstatement and misstatement were corrected in time, can help certified public accountants to evaluate the risk of material misstatement in the current financial statements. However, it is worth noting that changes in the audited entity or its environment may cause such information to be irrelevant to this audit. For example, certified public accountants have known the design and implementation of internal control in the early stage, but during this period, the audited entity and its environment may change, resulting in corresponding changes in internal control. In this case, certified public accountants need to implement inquiries and other appropriate audit procedures (such as walk-through tests) to determine whether this change may affect the relevance of such audit information.

According to the requirements of auditing standards, certified public accountants should understand the audited entity and its environment from six aspects. It should be noted that certified public accountants do not need to carry out all the above risk assessment procedures when they know every aspect. For example, if you know internal control, you generally don't need an analysis program. However, in the whole process of understanding the audited entity and its environment, certified public accountants usually implement all the above risk assessment procedures.