What is Assessment? Types and Method of Assessment

Assessment refers to the process of evaluating an organization’s financial statements, internal controls, and compliance with laws and regulations. The purpose of an assessment in an audit is to provide an independent and objective assessment of the accuracy and integrity of an organization’s financial information and to ensure that the organization is adhering to relevant laws and regulations.

During an audit, an auditor will use a variety of assessment techniques to evaluate the organization’s financial statements and internal controls.

Definition of Assessment

• An IT security assessment is a key activity that involves the management of risk — and uncertainty that might lead to a loss.
• “Assessment is an evaluation process against the security perimeters and controls in the organization with respect to the standard or compliance.”

Types of Assessment

There are several types of assessments that can be used in an audit, including:

1. Risk assessment: This type of assessment involves identifying and evaluating the potential risks to an organization’s financial statements and internal controls. The auditor will use this information to determine the nature, timing, and extent of audit procedures needed to obtain reasonable assurance of the financial statements being free of material misstatement.
2. Compliance assessment: This type of assessment involves evaluating whether an organization is following relevant laws and regulations, such as tax laws, securities laws, and labor laws.
3. Internal control assessment: This type of assessment involves evaluating the effectiveness of an organization’s internal controls, including its system of authorization and approval, to ensure that they are functioning as intended.
4. Operational assessment: This type of assessment involves evaluating an organization’s operations and processes to identify opportunities for improvement.
5. Information systems assessment: This type of assessment involves evaluating the effectiveness and efficiency of an organization’s information systems and technology infrastructure.
6. IT General control assessment: This type of assessment involves evaluating the effectiveness of IT controls related to the financial reporting process.
7. Fraud risk assessment: This type of assessment involves identifying and evaluating the potential risks of fraud in an organization.
8. Environmental, social, and governance (ESG) assessment: This type of assessment involves evaluating an organization’s environmental, social, and governance policies and procedures.

The choice of assessment method depends on the type of organization and its industry, as well as the specific audit objectives and risks. Auditors will often use a combination of these assessment techniques to obtain reasonable assurance of the financial statements being free of material misstatement.

Techniques used in Assessment

1. Analytical procedures: This involves comparing financial data to industry benchmarks and prior periods to identify unusual fluctuations or patterns.
2. Tests of controls: This involves evaluating the effectiveness of the organization’s internal controls, such as its system of authorization and approval, to ensure that they are functioning as intended.
3. Substantive procedures: This involves testing the accuracy of specific financial statement accounts, such as inventory and accounts receivable, by examining underlying documentation and transactions.
4. Compliance testing: This involves evaluating whether the organization is following relevant laws and regulations, such as tax laws, securities laws, and labor laws.

The auditor will document the results of the assessment in an audit report, which will be provided to the organization’s management, board of directors, and other stakeholders. The report will include any findings or recommendations for improvement and will indicate whether the financial statements are presented fairly in all material respects.

Methods of Assessment

On a broad level, there are only three methods of Assessment as followed

1. Examination: This method involves physically examining documents, records, and other evidence to verify their authenticity and accuracy. For example, an auditor may examine invoices, receipts, and bank statements to confirm the existence of transactions.
2. Testing: This method involves performing procedures to test the accuracy of specific financial statements accounts, such as inventory and accounts receivable, by examining underlying documentation and transactions. For example, an auditor might test the accuracy of a sample of inventory counts.
3. Interview: This method involves asking questions of an organization’s management and employees to gather information. For example, an auditor may interview the organization’s accounting staff to understand the company’s process for recording revenue.