Week 5 Planning PowerPoints- Part 2 recorded

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Part 2 of our discussion regarding planning.

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Presentation Transcript

Materiality:

Materiality Quantitative Criteria: Absolute size Relative size Cumulative effects Qualitative Criteria Nature of the item or issue Circumstances Uncertainty Materiality refers to an amount (or transaction) that would influence the decisions of users (i.e., an amount (or event) that would make a difference). The emphasis is on user, rather than management or the audit team. Materiality Criteria: Ultimately, materiality is a matter of professional judgment . 3- 1

Qualitative Factors:

Qualitative Factors

Using Materiality on the Audit:

Using Materiality on the Audit As a guide to planning substantive procedures —directing attention and audit work to those items or accounts that are important, uncertain, or susceptible to errors or frauds. As a guide to evaluation of the evidence. Auditors use performance materiality to make sure that the aggregate of uncorrected and undetected immaterial misstatements does not exceed materiality for the financial statements as a whole. As a guide for making decisions about the audit report . 3- 3

Materiality and Detection Risk:

Materiality and Detection Risk Materiality is directly related to detection risk. When detection risk is low; materiality should be set at a lower level to force the auditors to look at more granular (detailed) evidence This will result in more extensive audit procedures…a more costly audit However, it should result in a more effective audit because the auditors gather more evidence to support their opinion

Considering the Work of Internal Auditors:

Considering the Work of Internal Auditors Must obtain an understanding of a client ’ s internal audit department and its work Audit efficiency can be realized when the two groups work together Prior to using the work of internal auditors, external auditors should consider internal auditors ’ objectivity and competence Internal auditors should not be delegated tasks that require extensive professional judgment 3- 5

Use of Specialists:

Use of Specialists Specialists are persons skilled in fields other than accounting and auditing who are not members of the audit team Auditors must know about the specialist ’ s professional qualifications, experience and reputation Should be unrelated to the company being audited Auditors should obtain an understanding of the specialist ’ s methods and assumptions Specialists are not referred to in the audit report unless the specialists ’ findings cause the auditors ’ report to be modified 3- 6

Use of IT Auditors:

Use of IT Auditors Specialized skills are often needed to evaluate the effect of computerized processing on the audit, to understand the flow of transactions, or to design and perform audit procedures IT auditors are members of the audit team and are called in when the need for their skills arises Audit managers and partners should possess sufficient knowledge to know when to call on specialists and to supervise their work 3- 7

Time Budget:

Time Budget Used to maintain control of the audit by identifying problem areas early in the engagement, thereby ensuring that the engagement in completed on a timely basis Interim audit work refers to procedures performed several weeks or months before the balance sheet date Year-end audit work refers to procedures performed shortly before and after the balance sheet date 3- 8

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