Auditing and assurance services 14e by arens chapter 09

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Materiality and Risk Chapter http://www.authorstream.com/shengv n/ ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Apply the concept of materiality to the audit ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 9-2 Materiality Major consideration in determining the appropriate audit report Referenced in audit report’s scope paragraph What is meant by the term “material”? ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 9-3 Materiality Auditor’s responsibility = determine whether financial statements are materially misstated Auditor will bring material misstatements to the client’s attention so corrections can be made ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 9-4 Steps in Applying Materiality ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 9-5 Learning Objective Make a preliminary judgment about what amounts to consider material ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 9-6 Set Preliminary Judgment About Materiality Auditors set materiality thresholds early in the engagement Thresholds represent the maximum statements that could be misstated and still not affect users decisions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 9-7 Factors Affecting Judgment Materiality is a relative rather than an absolute concept Bases are needed for evaluating materiality Qualitative factors also affect materiality ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 9-8 Qualitative Factors Considerations that may render material a quantitatively small misstatement include: Loan covenants Changing trend Management compensation Financial statements users Conceals an illegal act ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 9-9 Guidelines Accounting and auditing standards not provide specific materiality guidelines Professional judgment is used to set and apply materiality guidelines ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 10 Learning Objective Consider the impact of several factors on the assessment of inherent risk ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 31 Factors Affecting Inherent Risk Nature of Client’s Business  Industry practices  Non-routine transactions  Makeup of the population Audit Experience  Prior audit results  Initial vs repeat engagement  Audit judgment required to correctly record balances and transactions Culture  Related parties  Factors related to fraudulent financial reporting  Factors related to misappropriation of assets ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 32 Learning Objective Discuss the relationship of risks to audit evidence ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 33 Relationship of Factors Influencing Risks to Risks and Risks to Planned Evidence Acceptable audit risk D D Factors influencing risks Inherent risk I Planned detection risk I I I Planned audit evidence D Control risk D = Direct relationship; I = Inverse relationship ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 34 Relationship of Factors Influencing Risks to Risks and Risks to Planned Evidence Auditors can change the audit to respond to risks The engagement may require more experienced staff The engagement will be reviewed more carefully than usual ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 35 Audit Risk for Segments Both control risk and inherent risk are typically set for each cycle, each account, and often even each audit objective, not for the overall audit ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 36 Tolerable Misstatement, Risks, and Balance-related Audit Objectives It is common to assess inherent and control risk for each balance-related audit objective It is not common to allocate materiality to objectives ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 37 Risk and Evidence ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 38 Measurement Limitations One major limitation in the audit risk model is the difficulty of measuring the components of the model Known Unknown Preliminary Assessed Level of Risk Actual level of risk achieved on the audit +/- ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 39 Relationships of Risk to Evidence Acceptable Inherent audit risk risk Control risk Planned detection risk High Low Low High Low Low Low Medium Medium Low High High Low Medium Medium Medium Medium Medium High Situation Low Amount of evidence required Low High Medium Medium Medium ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 40 Tests of Details of Balances Evidence Planning Worksheet Auditors develop various types of worksheets to aid in relating the considerations affecting audit evidence to the appropriate evidence to accumulate ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 41 Learning Objective 10 Discuss how materiality and risk are related and integrated into the audit process ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 42 Relationship of Tolerable Misstatement and Risks to Planned Evidence Acceptable audit risk Inherent risk Control risk I D Planned detection risk I D I I Planned audit evidence D I Tolerable misstatement D = Direct relationship; I = Inverse relationship ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 43 Revising Risks and Evidence The auditor must revise the original assessment of the appropriate risk The auditor should consider the effect of the revision on evidence requirements, without the use of the audit risk model ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 44 End of Chapter ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 45 ... Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 9-9 Guidelines Accounting and auditing standards not provide specific materiality guidelines Professional judgment is used to set and apply materiality... Business Publishing, Auditing 14/e, Arens/ Elder/Beasley - 14 Estimated Total Misstatement and Preliminary Judgment ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley -... Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley - 16 Learning Objective Define risk in auditing ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley - 17 Risk
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