Question

Please see below the discussion questions for this week:

(1) Discuss the reliability of internal and external documentation. Provide two examples of each type of documentations.

(2) The auditor's report in the U.S. does not provide user with details on the level of materiality that the auditor used during the audit. Do you think that the audit report should disclose materiality levels? Why might the user find such information useful? Why might auditors hesitate to publicly reveal the level of misstatement that they will accept as "immaterial"? Would management have a preference regarding the public disclosure of materiality?

Answer 1

1. Internal Documentation:-The internal documentation involves the documents for auditor's examination that are prepared and used within the client's organization. The reliability of internal documentation can be influenced by the effectiveness of Internal control and as well as management motivation to individual accounts such as fraud and bribery. Examples of internal documentation are:- Employee's time report, duplicate sale invoices, management exception reports,inventory receiving reports etc.

2.External Documentation:- The external documentation involves the documents for auditor's examination that are in the hands of someone else outside the client's organization.The external documents are prepared by the knowledgeable and independent outside party and are received by the auditor directly which makes them more reliable. Examples of external documentation are:- Insurance policies, cancelled checks,shipping and receiving reports, balance confirmation reports etc.

2 .Materiality is one of the fundamental auditing concepts throughout the entire auditing process starting from planning the audit process till the issuance of audit report.

The auditor's report in the U.S. does not provide user with details on the level of materiality that the auditor used during the audit. Material disclosures and related information needs to be communicated to those charged with governance but to the users of financial statements, it is to be disclosed only if it is expected to influence the economic decisions of the users otherwise there is no such requirement for the disclosure of the same.

Several studies have shown that materiality disclosures in the audit report may have beneficial effects but may also have the potential drawbacks too. The users' perspective seems to conclude that materiality should be disclosed but from the auditor perspective, they are rather apprehensive about disclosing materiality. The main reason behind this is that auditor consider the material information as sensitive and proprietory and disclosing the materiality thresholds gives the impression that materiality is not a matter of professional judgement and could mislead users.That is why the auditors hesitate to publicly reveal the level of misstatement that they will accept as "immaterial"

Management should also know what type of information their primary users want and expect to be included in the financial report.They should identify that what is material for their primary users and shall present the information in a meaningful way that emphasis those matters that are likely to be of most interest to the users.They do have the preference regarding the public disclosure of materiality as it is the primary responsibility of the management to provide the right level information to its users in the financial statements.