Question

• According to your textbook, auditors have to make judgments concerning materiality on every audit. Since the auditing standards give no formal guidance for how to determine materiality, auditors must rely on their own experience. Determine at least three (3) qualitative factors that affect the auditor's judgment. Provide a rationale for your response.
• According to the textbook, auditors rely on the audit risk formula to determine the types and amount of audit evidence to collect in order to keep the overall audit risk of engagements to a minimum or below defined tolerable limits. Suggest an alternative to the audit risk equation in order to mitigate audit risk. Support your rationale with examples of the successful use of the alternative strategy.

Answer 1

The qualitative factors that affect the auditor's judgment concerning materiality on every audit include:
-   Factors that result in the fraud or non compliance are industry and organization specific – where a Auditor studies and understands the industry regulations and in house policies and procedures of the company and business to come to a conclusion about the judgment.
-   Frame of Reference; it usually pertains to the standard or benchmark established by the Audit Committee or the management against which the expected audit activity is measured so as to keep the Audit approach and scope confined within fixed lines.
-   Type of Systems, Documentation and people involved in the audit work; that restricts the Audit objective within a particular business environment.
Alternatives to the audit risk equation in order to mitigate audit risk would include the below strategies:
-   Breaking or segregating the Audit Approach into sub parts to be tested and audited separately – covering a specific aspect of the business and requiring a unique set of documentation evidence.
-   Framing the Scope of the Audit Approach in such a way that clearly defines the materiality of the Audit activity and the parameters of the audit testing and review work.
-   Establishing continuous communication with the function or the business counterparts to have a systematic understanding of the business and hierarchy involved for escalation and approval matters.
-   Designing the Audit charter and testing approach of the activity to be approved by the Partner in concern or the Director in the management from Governance perspective.