8. Materiality And Audit Risk

Front 1

Link

Back 1

between Truth and Fairness and Materiality

Front 2

ISA 320

Back 2

Materiality

Front 3

Materiality

Back 3

1.individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users
2. ISA 320

Front 4

We use ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,to determine

Back 4

Judgment:
1. surrounding circumstances,
2. size or nature of a misstatement

Front 5

Assumptions (4)

Back 5

1. Reasonable knowledge
2. Understand that FS are prepared, presented and audited to levels of materiality
3. Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events; and
4. Make reasonable economic decisions

Front 6

2 levels

Back 6

1. Performance materiality/ Individual items
2. FS as a whole

Front 7

Evaluate effect of uncorrected misstatements

Back 7

1. auditor and management may not agree
2. asks to correct if he does no longer misstatement
3. if uncorrected

Front 8

FS level (4)

Back 8

1. select benchmarks (pre/after-tax profit, total revenue)
2. select financial data for benchmark
3. determine % applied to benchmark, a lot judgment involved, varies a lot
4. Update as go along

Front 9

Performance materiality (6)

Back 9

1. if benchmarks are wrong your materiality levels will be wrong
2. Entity- understand, IT/bank/retail/
3. Need to estimate what is material
4. understand client/business
5. understand needs of users of FS
6. Update as go along

Front 10

Audit risk

Back 10

1. Risk that the auditor expresses an inappropriate audit opinion.
2. Fundamental chance of being wrong
3. risk of material misstatements + detection risk

Front 11

ISA 315

Back 11

Says about Audit Risks

Front 12

Risk of material misstatements

Back 12

1. Out of control of auditor
2. Inherent + Control Risk
3.

Front 13

Inherent risk (2 levels)

Back 13

1. Organizational level. some sectors risky by nature, board structure (diversified, one person rule), complex, off balance sheet items, financial strain, strategy- expansion.
2. Transaction level- valuation of assets- judgment, level of human interaction- the more the riskier, errors, fraud

Front 14

Control risk

Back 14

1. Risk that controls will fail to detect material misstatements.
2. Put up by organization, internal audit team
3. Effective?
4.

Front 15

Detection risk

Back 15

Risk of failing to detect material misstatements
1. Can control
2. Can't check everything, resources, have to compromise
3. Procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, individually or when aggregated
4. Try to bring down overall audit risk by adjusting detection risk.
5. Cost and Profit trade off, more audit work higher costs need to pass on to the client.

Front 16

ISA 315

Back 16

1. Auditor to design and implement responses to risk of mat. misstatements
2. HOW???==> By understanding entity, its environment and Internal controls