Financial Systems and Auditing

The auditor should consider planning materiality. When a financial statement account exceeds the planning materiality, that account should be considered significant for both the audit of internal control over financial reporting and the financial statement audit. The more the account exceeds planning materiality, the greater it should be considered significant.

Materiality is the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable

Revenue would be the new base that would be used to determine materiality. Total assets is another good alternative, however this company does not have many operating assets (only inventory and PPE are the significant accounts)

3. AASB 1031 materiality. Planning materiality and performance materiality – are only for auditors. Planning materiality – one base for the whole statement. For public companies – net profit since people are more focussed on that only if it is stable, if not pick total revenue or total assets. Used for financial statements as a whole.

Why are different materiality bases considered when determining planning materiality? Why are different materiality thresholds relevant for different audit engagements? Why is the materiality base that results in the smallest threshold generally used for planning purposes? Why is the risk of management fraud considered when determining tolerable misstatement? Why might an auditor not use the same tolerable misstatement amount or percentage of account balance for all fmancial statement accounts? Why does the combined total of individual account tolerable misstatements commonly exceed the estimate of planning materiality? Why might certain trial balance amounts be projected when considering planning materiality?

Different materiality bases are considered when determining planning materiality because the magnitude and nature of financial statement misstatements or omissions have different influences on different financial statement users. For example, investors are more interested in the accuracy of numbers involving net income because they are mainly concerned with the company’s ability to increase shareholder wealth. For an audit company, the primary concern when planning materiality is to take into account all expected financial statement users. These different expected users all have different

“The nature and extent of planning activities that are necessary depend on the size and complexity of the company, the auditor 's previous experience with the company, and changes in circumstances that occur during the audit. When developing the audit strategy and audit plan, the auditor should evaluate whether the following matters are important

documentation, materiality and risk, internal control, statistical tools, and the overall audit plan and program.

"In applying analytical procedures as risk assessment procedures, the auditor should perform analytical procedures relating to revenue with the objective of identifying unusual or unexpected relationships involving revenue accounts that might indicate a material misstatement, including material misstatement due to fraud. Also, when the auditor has performed a review of interim financial information in accordance with AU sec. 722, he or she should take into account the analytical procedures applied in that review when designing and applying analytical procedures as risk assessment procedures."

To express an opinion on the financial statements based on their audits, which is conducted in accordance with International Standards on Auditing.

Section I. The Auditor’s Report With Regard to the Auditor’s Report............................................................................................... II. General Audit Procedures With Regard to Client Acceptance .................................................................................................. With Regard to Client Understanding ............................................................................................. With Regard to Audit Planning

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

Step 1: Determine a materiality level for the overall financial statements. The auditor should establish a materiality level for the financial statements taken as a whole. This will be referred to as planning materiality. Planning materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users. Materiality, however, is a relative, not an absolute, concept.

We have the responsibility that if a material weakness and or a significant deficiency are discovered in the performance of the audit, it should be communicated to the audit committee in writing (PCAOB, 2014). The management is also responsible to adjust the financial statements to correct material misstatements found during the audit; if the correction are not done because they are immaterial, it should be stated as part of the representation letter were management is confirming their responsibilities during the audit (PCAOB, 2014).

Every firm faces risks, both internal and external, that must be dealt with. In order to assess risk, the auditor must understand what roll the area that’s being audited plays in the business. The purpose of risk assessment is to identify and evaluate the risks relevant to that area of the business and to determine how to manage these risks. The auditor then identifies the internal controls that regulate those risks – these are the internal controls the auditor should focus on. As a result of identifying the relevant risks, the auditor should be able to develop a scope for the audit. The goal is to provide a framework in which to develop the audit plan.