Question

Which of the following are always necessary in a financial statement audit?

1) Test of operating effectiveness of controls
2) Analytical Procedures
3) Risk Assessment Procedures

Answer 1

Risk Assessment Procedures and Analytical Procedures are always necessary in a financial statement audit, whereas tests of operating effectiveness of controls may not always be required depending on the audit approach.

Step-by-step explanation:

During a financial statement audit, there are certain procedures that are always necessary. Among these are:

• Risk Assessment Procedures: The auditor must understand the entity and its environment, including its internal control, to assess the risk of material misstatement in the financial statements, whether due to fraud or error.
• Analytical Procedures: These are used to some extent during the planning and conclusion stages of the audit to assist in understanding the entity's business and in identifying areas of potential risk.

However, tests of operating effectiveness of controls might not be necessary if the auditor decides to take a substantive approach rather than relying on the controls, especially if the controls are deemed ineffective or if it is a smaller entity where detailed controls are not prevalent.

So, of the given options, Risk Assessment Procedures and Analytical Procedures are always required in a financial statement audit, while tests of operating effectiveness of controls may not always be necessary.