Question

Question 6 (20 marks)

The following questions deal with the topics of materiality and risks.

(a) Assume the clients are of the same size and the same materiality is used for each, state whether each of the following statements is true or false. Justify your answers.

(i) The audit evidence accumulated for every client should be approximately the same, regardless of the circumstances.

(ii) If the audit evidence accumulated for two different clients is approximately the same, achieved audit risk is approximately the same.

(iii) If desired audit risk is the same for two different clients, the audit evidence for the two clients should be approximately the same.

(iv) If desired audit risk, inherent risk, and control risk are approximately the same for two different clients, the audit evidence for the two clients should be approximately the same.

(v) A CPA firm should decrease acceptable audit risk for audit clients when external users rely heavily on the statements.

(b) You are evaluating audit results for current assets in the audit of Speedy Plumbing Ltd. You set the materiality for current assets at $50,000 for overstatements and at $80,000 for understatements.

Required:
(i) Explain why you may have set a lower preliminary judgement about materiality for overstatements than understatements in this situation.

(ii) Explain why materiality is important but difficult to apply in practice.

Answer 1

The audit evidence accumulated for every client should be approximately the same, regardless of the circumstances.- false

Auditor should collect audit evidence on the basis of Risk . They have to do Risk Analysis of the client before selecting document and determined material limit.

As per PCAOB – Auditing Standard 15 – Sufficiency is the measure of the Quantity of Audit evidence depends on : Risk of material Misstatement – mainly in case of audit of financial Statement and risk associated with the control.

As the risk increase , the amount of evidence that the auditor should obtain also increase

If the audit evidence accumulated for two different clients is approximately the same, achieved audit risk is approximately the same.- No true because ,

Relevance and Reliability of Audit evidence refers to its relationship to the assertion or the objecting of the controlling being tested . the relevance of audit evidence on :

The design of the audit procedures used to test the assertion or Control.

Even though audit evidence accumulated for two different clients is approximately same but achievement of audit risk can not be same . it depends on Companies internal control system . Auditor needs to check Existence , occurrence , completeness etc.

If desired audit risk is the same for two different clients, the audit evidence for the two clients should be approximately the same.- True

Yes As explained above , Auditor before selecting Audit evidence , verify or review existing risk system and risk mismanagement etc.

If desired audit risk, inherent risk, and control risk are approximately the same for two different clients, the audit evidence for the two clients should be approximately the same.

Most important to note that Audit procedures can be classified the following categories :

Risk Assessment procedures

Further audit procedures which consist of :

1. Test of control
2. Substantive procedures , including test of details and substantive analytic procedures

Inspection- This involves examining of records , internal and external , physical examine of assets ,

Inspection of audit evidence of varying degree of reliability , depending on their nature and sources

A CPA firm should decrease acceptable audit risk for audit clients when external users rely heavily on the statements.- Not necessary – as per PCAOB and Auditing Standard , Auditor while doing Audit of financial Statement need to follow – risk assessment procedure , test of control and substantive procedure .

Auditor should not limit their audit work because of External Users rely heavily on the statement

Materiality in Auditing – Importance – The auditor expresses an opinion on whether the financial statement are prepared in all material respects, in accordance with an applicable financial reporting framework , such as IFRS and ISA 320.

Commonly , it will be calculated by applying % to a chosen benchmark such as Profit before tax or Net Assets . the auditor used to judgement in selecting the overall materiality level.

The justification for a lower preliminary judgement about materiality  for overstated is directly related to legal liability and audit risk. Some accounts are likely to be overstated while others are likely to be understated , resulting in net misstatement that is likely to be less than overall materiality.