What is the first step in justifying audit risks in key areas?

The first step in justifying audit risks in key areas is to assess whether the balance could be misstated. This step is crucial because it involves identifying the possibility of misstatements in the financial information that could significantly impact the financial statements. By determining if a particular balance, such as an asset or liability, has the potential for misstatement, auditors can better focus their efforts on areas that are vulnerable to error or fraud.

Understanding the risk of misstatement helps auditors establish a basis for further evaluations and subsequent steps, such as planning the nature, timing, and extent of audit procedures. It is a foundational aspect of identifying and assessing risks inherent in the audit process, allowing for a more targeted approach to audit planning and execution. This initial assessment guides the auditor in determining the appropriate level of scrutiny needed for different areas of the financial statements.

The other options, while relevant to the overall audit process, do not represent the very first step in justifying audit risks. For instance, conducting a risk assessment typically follows the initial evaluation of misstatement potential, as does summarizing audit objectives and categorizing financial information. Each of these plays a role in the audit strategy but starts after establishing which balances pose a risk of misstatement.