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Easy understanding about the Audit risk Materiality

SUMMARY: Audit risk is a function of the risk that the financial statements prepared by: management is materially misstated and the risk that the auditor will not detect such material misstatement In other words, audit risk refers to the probability that the auditor will issue an inappropriate opinion on the financial statements. The auditor should consider

Audit risk in relation to the relevant assertions related to individual account balances, classes of transactions, and disclosures and at the overall financial statement level.

The auditor may reduce audit risk by determining overall responses and designing the nature, timing, and extent of further audit procedures based on those assessments. The auditor should perform risk assessment procedures to assess the risks of material misstatement both at the financial statement and the relevant assertion levels.

The Audit Materiality:

Materiality is one of the basic and major concepts of auditing. Auditing and Assurance Standard (AAS) “Audit Materiality”, states that the concept of materiality recognizes that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of the financial information in conformity with recognized accounting policies and practices.

Audit Risk and Materiality:

The relationship between materiality and the audit risk. When conducting an audit, the auditor should consider materiality and its relationship with audit risk. The level of detection risk can be considered only after considering the level of inherent and control risks. While planning an audit, the auditor should keep in mind that the audit risk is to be kept at an acceptably low level. The range, efficiency, efficacy, nature and timing of the procedures performed by the auditor will determine the level (i.e. high or low) of detection risk. . For example, a small omission repeated frequently could have a significant cumulative impact on (for example) the total number of certificates that may be created or the calculation of any annual greenhouse shortfall. Lead auditors seeking further guidance on materiality in greenhouse-related audits should consult

The auditor should determine Audit risk and materiality affect the nature, timing, and extent of auditing procedures, also a materiality level for the financial statements well as the evaluation of those results. They affect the application of generally accepted auditing standards. (GAAP)In particular, audit risk and materiality affect the standard of fieldwork and reporting.

Determining a materiality level for the financial statements taken as a whole helps guide the auditor's judgments in identifying and assessing the risks of material misstatements and

In planning the nature, timing, and extent of further audit procedures.

The auditor should plan the audit so that audit risk is limited to a level acceptable for expressing an opinion on the financial statements, based on the auditor’s professional judgment. Audit risk may be assessed in quantitative or qualitative terms.

Audit risk always exists. Even when audits are well planned and carefully performed, an Auditor is at best only able to obtain reasonable assurance. The nature of audit evidence is

Such that absolute assurance that material misstatements are detected is not possible. Furthermore the characteristics of fraud make it impossible to obtain absolute assurance.

Other court cases

When concluding as to whether the effect of misstatements, individually or in the aggregate, is material, an auditor should consider the nature and amount of the misstatements in relation to the nature and amount of items in the financial statements under audit. For example, an amount that is material to the financial statements of one entity may not be material to the financial statements of another entity of a different size or nature. Also, what is material to the financial statements of a particular entity might change from one period to another.

The general consensus appears to be that materiality would affect the judgment of an average informed user about financial statements.

1. Have appropriate knowledge of business and economic activities,

2. Study the financial statements with due diligence,

3. Understand the concept of materiality, and

4. Understand that use of estimates and professional judgment about future events results in inherent uncertainties.

The another procedures of assessment of audit materiality - In making materiality judgments, auditors should consider both quantitative and qualitative factors as well as results of any assessment of the following factors:

I. the significance of an individual item to the Benchmark Statement

II. Whether the misstatement of a control or system weakness, which would have routine effects on figures being reported

Conclusion: Audit risk and materiality have a direct effect on auditor’s judgment concerning the sufficiency and appropriateness of evidence that is used to determine the fair presentation of financial statements. The auditor should consider audit risk and materiality,

“Objective and Scope of the Audit of Financial Statements”, states that the auditor’s opinion helps determination of the true and fair view of the financial position and operating results of an enterprise. The user, however, should not assume that the auditor’s opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.

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