Chapter 09 Slides

Chapter 09 Slides - 9 - 1 Click to edit Master subtitle...

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Unformatted text preview: 9 - 1 Click to edit Master subtitle style Acct 4510/5510 9 - 1 Materiality and Risk Chapter 9 11 Acct 4510/5510 9 - 2 Acct 4510/5510 Planning an Audit and Designing an Audit Approach (Discussed in Chapter 8) Accept client and perform initial audit planning. Understand the clients business and industry. Assess client business risk. Perform preliminary analytical procedures. 22 Acct 4510/5510 9 - 3 Acct 4510/5510 Planning an Audit and Designing an Audit Approach (Discussed in Chapter 9) Set materiality and assess acceptable audit risk and inherent risk. 33 Acct 4510/5510 9 - 4 Acct 4510/5510 Planning an Audit and Designing an Audit Approach (Subsequent Chapter Discussions) Acct 4510/5510 44 Understand internal control and assess control risk. Gather information to assess fraud risks. Develop overall audit plan and audit program. 9 - 5 Acct 4510/5510 Materiality Acct 4510/5510 55 FASB 2 The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. The auditors responsibility is to determine whether financial statements are materially misstated. If there is a material misstatement, the auditor will bring it to the clients attention so that a correction can be made. Materiality is a major consideration in determining the 9 - 6 Acct 4510/5510 Steps in Applying Materiality Planning extent of tests (Covered in Chapter 9) Step 1 Set preliminary judgment about materiality Step 2 Allocate preliminary judgment about materiality to segments 66 Acct 4510/5510 9 - 7 Acct 4510/5510 Steps in Applying Materiality Evaluating Results (Covered here and in future chapters) Step 3 Estimate total misstatement in segment Step 4 Estimate the combined misstatement Compare combined estimate with judgment about materiality Step 5 77 Acct 4510/5510 9 - 8 Acct 4510/5510 Set Preliminary Judgment About Materiality This preliminary judgment is the maximum amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users. SAS 107 requires auditors to decide early in the audit the combined amount of misstatements of the financial statements that would be considered material. We call this the preliminary judgment about materiality . This judgment is preliminary (i.e. it can change) but MUST be document in WPs....
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Chapter 09 Slides - 9 - 1 Click to edit Master subtitle...

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