Thi is part of a group member discussion that can use for next paper
August 21, 2015
When an organization is being audited it is important to have a level of risk and a level of materiality that is acceptable for the organization. These amounts are established by the professional opinion of the auditor. It is based on the understanding of the entity, the environment, and the relationship between them. The level of risk and materiality will guide the audit levels of sampling and analysis of the financial material.
Relationship between Risk and Materiality
Risk in an audit is that the auditor may unknowingly fail to give the proper opinion of the financial statements because of material misstatements that have not been discovered during an audit (AICPA, 2015). The materiality of a statements is determined if a reasonable person would have changed their opinion of the financial statements if the mistake had not been reported. If there would have been a different opinion that the mistake is material. It is important that the materiality of the information is at a reasonable level. This will guide the level of depth that the audit will undertake. It will guide the level of sampling, the number of transactions reviewed, what account balances to review, and what questions should be asked. This will also form the number different types of analysis that is done on the financial statements.
How are Risk and Materiality Related
The relationship between risk and materiality is inverted. When there is a higher level of materiality there is a lower level of risk in the organization (AICPA, 2015). The level of materiality can also be reevaluated for the audit. If the auditor feels that the level of materiality is to low it might be able to be revised. This would than lower the risk of the audit. The level of materiality can change based on the level of internal controls, and the overall entity.
Integration of Materiality and Risk in the Audit.
The level of materiality and risk will influence the level of detail the audit will look at. The level of sampling and testing will be influenced by the level of materiality and risk (AICPA, 2015). The account balances and the dollar amount of transactions will also be influenced by the level. The auditor will need to be aware of the inherent risk which is the susceptibility that transactions have to misstatements. The control risk is when a misstatement can occur and not be discovered in a timely manner so that it can be corrected. Detection risk is the risk of the misstatement not being discovered. All of these levels of risk will need to be assessed in the planning of the audit. It will determine the detail discovery level.
Example of a Statement for Risk and Materiality
An example of a statement for risk and materiality is “Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance the material misstatements are detected.” (PCAOB, 2015).
The lower the level of risk the higher the level of materiality. The relationship between the two items is inverted. The level of materiality and risk is based on the professional opinion of the auditor because of the knowledge of the entity, the environment of the industry, and other important factors. These factors are how the auditor plans the level of detail that the audit will go into. The sample size, timing, and account balances that will be audited will be based on this information. They are both very important and the basis of which audits is performed.
AICPA.org, (2015),Audit Risk and Materiality in Conducting and Audit.Retrieved from
PCAOB, (2015),AU Section 312,Audit Risk and Materiality in Conducting an Audit, retrieved
Follow the guidelines in writing paper and answering questions below:
APA format for citation and references
Apa format paper with proper apa style of discussion above:
2 or more reference in same format:
1200 to 1500 words just to explain answers and how the calculations was done in details
Based on the group discussion, apply a risk assessment technique to decision making by using the following example:
Assume that you are going to use nonstatistical sampling to evaluate the results of accounts receivable confirmation for the Bovar audit. Results from previous audits have been excellent. Because of the high quality of the controls at Bovar, you have decided to use an acceptable risk of incorrect acceptance of 10%. There are 3,000 accounts receivable with a gross value of $9,601,883. You have decided that an overstatement or understatement of more than $150,000 would be considered material.
Complete the following:
- Calculate the required sample size using the following formula:
- Sample size = (book value of population / tolerable misstatement) x assurance factor
- Assurance factor:
- 5% ARIA = 3
- 10% ARIA = 2
- 20% ARIA = 1
- Assume that instead of good results from previous audits, Bovar had poor results and the controls in place were questionable. Discuss the following:
- How would this affect your sample size?
- How would you use this information in your sample size determination?
- How would you select the accounts for testing using systematic selection?