Usually ranges from 60 for high risk to 85 for low risk of the figure

Usually ranges from 60 for high risk to 85 for low

This preview shows page 61 - 72 out of 87 pages.

Usually ranges from 60% (for high risk) to 85% (for low risk) of the figure established for materiality for the financial report as a whole.
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Specific materiality Used by auditors in practice to refer to the ‘materiality level for particular classes of transactions, account balances or disclosures’. In some audit engagements, the auditor may need to identify misstatements of amounts that are less than overall materiality but would affect economic decisions of users of the financial report. Such misstatements could relate to sensitive areas, such as note disclosures regarding senior executives’ remuneration or non-compliance with loan covenants.
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FIGURE 4.10 INVERSE RELATIONSHIP BETWEEN MATERIALITY AND AUDIT RISK
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Relationship between Materiality and Audit Evidence 1. materiality level, evidence. (more or less?) evidence is needed where the materiality level is set at $100,000 rather than $200,000. 2. Larger or more significant an account balance is, evidence needed. An account balance of $30k where total assets is $100k needs (more or less?) evidence than an account balance of $10k. 64 More More
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Accounting materiality Materiality is a matter of relative significance. Any quantitative guideline for determining materiality must necessarily be arbitrary AASB 1031 was reissued in December 2013 to remove quantitative guidance. Framework for the Preparation and Presentation of Financial Statements, similar to ASA 320 (ISA 320), defines information as material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.
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LO 4.7: Types of audit test Tests of control Substantive tests
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Audit Procedures & Evidence The auditor : Assesses the risks of the client company Perform audit procedures to collect audit evidence to test managerial assertions inherent in the financial statements In order to provide reasonable assurance / an opinion on whether there are material misstatements in the client’s financial statements. 67
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Briefly, Internal controls Things organisations do to 1. protect assets, 2. ensure accuracy of records/reports, 3. help run operations effectively/efficiently, 4. comply with rules/regulations. E.g., physical/computer controls, separation of duties, proper authorisation. 68 Lowe r
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FIGURE 4.11 TYPES OF AUDIT PROCEDURE S
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Tests of control An auditor performs tests of control to obtain evidence about whether the control activities of the internal control system are effective. Involves obtaining evidence about: design of policies or procedures operating effectiveness of these policies or procedures (implementation). The tests are designed to provide evidence to support an assessment of control risk at a level below high (indicating reliance on the key controls).
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Substantive tests Performed on specific transactions and balances to see whether the dollar amount of an account balance is materially misstated.
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