1. PLANNING, MATERIALITY AND ASSESSING THE RISK OF MISSTATEMENT
LECTURE 5
PLANNING, MATERIALITY AND ASSESSING THE RISK OF MISSTATEMENT

2. OVERVIEW OF AUDIT PLANNING
ISA 300 requires auditors to plan the audit to:
perform the audit efficiently
meet requirements of ISA 200- Objectives of independent auditor in conduct of audit
ISA 300 refers to two documents
Overall audit strategy
Audit plan

3. Overview of Audit Planning
The overall strategy sets out general terms on how the audit is conducted
Characteristics of the engagement
Reporting objectives, timing of the audit and nature of communications
Significant factors, preliminary engagement activities
Nature, timing and extent of resources
The audit plan details specific procedures (Audit programs) to be carried out to implement the strategy and complete the audit

4. Audit Planning: Understanding the audit entity
In planning an audit, ISA 315 requires the auditor to identify risk of material misstatements through understanding the client and its environment
Understanding the audit entity helps to:
Identify and assess risk of material misstatements
Design and perform audit procedures
Provide frame of reference for judgments

5. Audit Planning: Understanding the audit entity and its Environment
ISA 315 set out areas to gain understanding of as
Industry, regulatory and other external factors
Nature of the entity
Selection, application and changes in accounting policies
business risk
Internal control
These understanding can be arrived through
Inquiries of management, Analytical procedures
Observation and inspection
Audit team discussion and prior knowledge

6. Audit planning and Risk assessment
Having identified risk of material misstatement through understanding of the client, the next steps are to
assess whether the risks so identified relate more pervasively to financial statement as a whole
Relate the risks to what can go wrong at the assertion level and assess controls in place to address each risk
Consider likelihood of the risk leading to material misstatement

7. Audit planning and Risk assessment
The auditor is required to pay attention to only significant risks
The risk may be significant if
It relates to fraud
It involves complex transaction
It is significant related party transaction
Unusual transaction

8. Auditors response to Assessed Risk- ISA 330
The auditor is expected to obtain sufficient, appropriate audit evidence regarding assessed risk of misstatement
Overall responses include emphasizing to the audit team the need for professional skepticism, assigning capable staff, using experts, providing adequate supervision and incorporating unpredictability into the timing, extent and nature of audit procedures

9. Auditors response to Assessed Risk- ISA 330
The auditor must carry out the following substantive procedures
Agree the financial statement to underlying accounting records
Examining material journals
Examining other adjustments made in preparing the financial statements
There should be documentation throughout the stages of risk identification, assessment, auditors response to the assessed risk and audit procedures and conclusions regarding risk

10. Audit Methodologies
These are ways adopted by the auditor in gathering audit evidence
Risk-based approach: audit efforts concentrated at areas of high assessed risked- AR=IR *CR*DR
Top-down approach- Business risk approach: High emphasis on test of controls and lower attention to substantive procedures (Link business risk with financial statement)
Other audit strategies (system audit, balanced sheet approach, transactional cycle approach, directional testing)
SEE PAGE )
Discuss question on page132

11. Materiality
Information, which if misstated, omitted, or not disclosed separately in a financial report may adversely affect either user decisions or the discharge of accountability by management- ISA 320
Auditor uses materiality to:
Evaluate the presentation of financial data.
Determine the nature, timing and extent of audit procedures (sometimes called planning materiality).

12. Assessing Materiality threshold
When planning the audit, an auditor makes a preliminary estimate of the amount to be considered material for audit purposes.
Conceptually encompasses:
Known misstatements;
Likely misstatements; and
Potential undetected misstatements.
A single amount is normally estimated for materiality because misstatements usually affect both balance sheet and income statement

13. Assessing Materiality threshold

14. Assessing Materiality threshold
An auditor should consider qualitative factors as well as quantitative assessment. Qualitative factors include:
The significance of the item of the particular entity;
The pervasiveness of the misstatement (for example the misstatement might affect the presentation of numerous items in the financial report); and
The effect of misstatement on the financial report as a whole.

15. Materiality and Audit Risk
There is an inverse relationship between audit risk and materiality.
An auditor sets a lower materiality threshold for accounts that have a higher audit risk. This means the auditor will need to collect more evidence for these accounts.

16. Risk
Risk comprises
Audit risk-Risk that auditor expresses inappropriate opinion
Inherent risk-susceptibility of a class of transaction to misstatement before consideration of related control
Control risk-risk that internal controls may not be sufficient in preventing, detecting or correcting misstatements
Detection Risk: Audit procedures not able to detect existence of material misstatement

17. Risks-Business Risk Business risk comprises Operational risk
Financial risk
Compliance risk

18. QUESTION
QUESTION BANK Q7- MARSDEN MANUFACTURING COMPANY PG 513

19. THANKS