During the audit of Urban Build Constructions Ltd., the auditor reviewed the accounting information system used for recording and processing…
CA Intermediate · Auditing and Ethics · PYQS · May 2026
During the audit of Urban Build Constructions Ltd., the auditor reviewed the accounting information system used for recording and processing financial transactions in the company. Transactions relating to purchases, payroll and expenses are recorded through this system by different departments. During discussion with employees, the auditor realized that there is limited documentation how financial information flows through the system. What are the areas relating to the entity's information system and related business processes relevant to financial reporting that the auditor should obtain an understanding as a part of risk assessment procedures?
Suggested Answer and Working Notes:
The auditor shall obtain an understanding of the information system, including the related business processes, relevant to financial reporting, including the following areas: (i) The classes of transactions in the entity's operations that are significant to the financial statements. (ii) The procedures by which those transactions are initiated, recorded, processed, corrected as necessary, transferred to the general ledger and reported in the financial statements. (iii) The related accounting records, supporting information and specific accounts in the financial statements that are used to initiate, record, process and report transactions. (iv) How the information system captures events and conditions that are significant to the financial statements. An information system consists of infrastructure (physical and hardware components), software, people, procedures, and data. Many information systems make extensive use of information technology (IT). Information system should provide qualitative financial information. (v) The financial reporting process used to prepare the entity's financial statements. (vi) Controls surrounding journal entries. Alternate Answer The Entity's Risk Assessment Process The auditor shall obtain an understanding of whether the entity has a process for: (i) Identifying business risks relevant to financial reporting objectives (ii) Estimating the significance of the risks (iii) Assessing the likelihood of their occurrence (iv) Deciding about actions to address those risks (v) The entity's risk assessment process forms the basis for the risks to be managed. If that process is appropriate, it would assist the auditor in identifying risks of material misstatement. Risks can arise or change due to factor such as new technology, new business models, products or activities, changes in operating environment etc. Whether the entity's risk assessment process is appropriate to the circumstances is a matter of judgment.
Topics: Risk Assessment and Internal Control
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