acct 346: materiality, risk, audit evidence

materiality

whether financial information could be reasonably expected to influence the economic decisions of users

how is materiality used by auditors?

• considering the extent of audit procedures

• determining the appropriate treatment of detected errors

• determining the appropriateness of disclosure

• forming an audit opinion

materiality base

a chosen benchmark used as a starting point in determining materiality for the financial statements

what are some factors that influence the identification of appropriate benchmarks?

• elements of financial statements

• items on which the user’s attention tends to be focused

• nature of the entity/industry

• entity’s ownership structure and financing

• relative volatility of the benchmark

performance materiality (definition)

the total error an auditor is willing to accept in an account before concluding it is materially misstated

performance materiality (formula)

overall materiality x (draft figure / npbt)

audit risk (formula)

inherent risk x control risk x detection risk

audit risk

the risk that an auditor expresses an inappropriate opinion where the financial statements are materially misstated

inherent risk

susceptibility of an assertion that could be material before consideration of any related controls

what is inherent risk affect by?

• business risk

• risks at accounting level

control risk

the risk that a misstatement could occur in an assertion - that could be material - and will not be prevented/detected/corrected on a timely basis by the entity’s internal control

what is control risk affected by?

• quality of system design

• compliance and enforcement of procedures

• extent of system changes

what are some inherent limitations of internal controls?

• cost/benefit criteria used to implement

• focus on routine transactions

• human error

• abuse of responsibility

• changes in conditions

detection risk

risk that the 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

what is detection risk affected by?

• sampling risk ($ constraint)

• quality control risk (incl those with expertise in the client’s industry)

  • incorrect/inappropriate audit procedures

  • inadequate planning and control

  • failures in audit judgement

  • misinterpretation of results

audit evdience

information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based

sufficiency

the measure of the quantity of audit evidence

what is sufficiency influenced by?

• materiality and risk of misstatement

• economic factors

• size and characteristics of accounting population

• audit judgement

appropriateness

the measure of the quality of audit evidence

what is appropriateness influenced by?

• relevance

• reliability

what are the two classifications of audit evidence?

• directly observable

• indirectly observable

audit workpapers

the record of audit procedures performed, relevant evidence obtained, and conclusions the auditor reached

what to workpapers help to do?

• plan and perform the audit

• renew and supervise the audit

• provide evidence that the audit results support opinions