MATERIALITYANDRISKSECTION 8.ppt

MATERIALITY AND RISK SECTION 8 Importance of Materiality and Risk Materiality and risk underlie the application of all generally accepted auditing standards Must consider materiality and risk in: Planning Evaluation of F/S Materiality Presented fairly in accordance with GAAP implies? From an accounting perspective, materiality involves the determination of what information should be reported From an auditing perspective? CICA Handbook definition: A matter of judgment Thus handbook requires the auditor to consider Circumstances of the company The users of the F/S The auditor makes a preliminary judgment about materiality levels in planning the audit May ultimately differ from materiality levels used in evaluating audit findings Materiality involves both qualitative and quantitative considerations In assessing the quantitative amount it is necessary to relate the nature and dollar amount to the F/S In planning, the auditor is usually concerned with just the quantitative Qualitative? Financial Statement Materiality It is necessary for the auditor to assess materiality on the F/S because the auditors opinion on fairness extends to the F/S taken as a whole Thus what does it mean when F/S are materially misstated? Error or fraud In planning there can be more than one level of materiality relating to the F/S Income statement materiality is often related to net income Any other choices? Balance sheet materiality is often related to total assets Other choices? The smallest aggregate level of errors considered material to any one of the F/S should be used for planning Why is this rule appropriate? The nature of the financial statements Auditing procedures As an example consider the auditing procedure to determine that year-end sales are recorded in the proper period Account Balance Materiality The maximum error that can exist in an account before it is considered materially misstated Inverse relationship between materiality and aud