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1、8-12003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyMateriality and RiskChapter 88-22003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 1Apply the concept ofmateriality to the audit.8-32003 Prentice Hall Business
2、 Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyMaterialityThe auditors responsibility is todetermine whether financialstatements are materially misstated.If there is a material misstatement,the auditor will bring it to the clientsattention so that a correction can be made.8-42003 Prentice
3、 Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleySteps in ApplyingMaterialityStep1Set preliminaryjudgment aboutmateriality.Planningextentof testsStep2Allocate preliminaryjudgment aboutmaterialityto segments.8-52003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,A
4、rens/Elder/BeasleySteps in ApplyingMaterialityStep3Estimate totalmisstatement in segment.EvaluatingresultsStep4Estimate thecombined misstatement.Compare combinedestimate with judgmentabout materiality.Step58-62003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearni
5、ng Objective 2Make a preliminary judgmentabout what amounts toconsider material.8-72003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleySet Preliminary JudgmentThis preliminary judgment is the maximumamount by which the auditor believes thestatements could be misstate
6、d and still notaffect the decisions of reasonable users.Ideally,auditors decide early in the auditthe combined amount of misstatementsof the financial statements that wouldbe considered material.8-82003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyFactors Affecting
7、 Judgment8-92003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 3Allocate preliminary materialityto segments of the auditduring planning.8-102003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyAllocate Preliminary J
8、udgment About Materiality to SegmentsThis is necessary because evidence isaccumulated by segments rather thanfor the financial statements as a whole.Most practitioners allocate materialityto balance sheet accounts.SAS 39(AU 350)8-112003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Ar
9、ens/Elder/BeasleyLearning Objective 4Use materiality to evaluateaudit findings.8-122003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyEstimated TotalMisstatement ExampleNet misstatement of the sample$3,500$50,000$450,000=$31,500Total recorded population valueTotal s
10、ampledDirect projection estimate of misstatement=8-132003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyExample of Estimatefor Sampling ErrorTolerable Direct SamplingAccount Misstatement Projection Error TotalCash$4,000$0$N/A$0Accounts receivable 20,000 12,000 6,000
11、*18,000Inventory 36,000 31,500 15,750*47,250Total estimated misstatement amount$43,500$16,800$60,300Preliminary judgment about materiality$50,000*estimate for sampling error is 50%8-142003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 5Define risk
12、 in auditing.8-152003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyRiskAuditors accept some level of riskin performing the audit.An effective auditor recognizes thatrisks exist,are difficult to measure,and require careful thought to respond.Responding to risks prop
13、erly is criticalto achieving a high-quality audit.8-162003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyRisk and EvidenceAuditors gain an understanding of theclients business and industry andassess client business risk.Auditors use the audit risk model to furtherid
14、entify the potential for misstatementsand where they are most likely to occur.8-172003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyExample of DifferingEvidence Among CyclesSales andCollectionCycleAcquisitionand PaymentCyclePayroll andPersonnelCycleInherentriskAmed
15、iumhighlowControlriskBmediumlowlowAcceptableaudit riskClowlowlowPlanneddetection riskDmediummediumhigh8-182003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyExample of DifferingEvidence Among CyclesInventory andWarehousingCycleCapital Acquisitionand RepaymentCycleIn
16、herentriskAhighlowControlriskBhighmediumAcceptableaudit riskClowlowPlanneddetection riskDlowmedium8-192003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 6Describe the audit riskmodel and its components.8-202003 Prentice Hall Business Publishing,Es
17、sentials of Auditing 1/e,Arens/Elder/BeasleyAudit Risk Modelfor PlanningPDR=AAR (IR CR)PDR=Planned detection riskAAR=Acceptable audit riskIR=Inherent riskCR=Control risk8-212003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 7Consider the impact of
18、engagement risk onacceptable audit risk.8-222003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyImpact of Engagement Riskon Acceptable Audit RiskAuditors decide engagement risk and usethat risk to modify acceptable audit risk.Engagement risk closely relates toclient
19、business risk.8-232003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyFactors AffectingAcceptable Audit RiskThe degree of which external usersrely on the statementsThe likelihood that a client will havefinancial difficulties after theaudit report is issued8-242003 Pr
20、entice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyFactors AffectingAcceptable Audit RiskThe auditors evaluation of managements integrity8-252003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyMaking the AcceptableAudit Risk DecisionExterna
21、l usersreliance onfinancialstatements Examine financial statements.Read minutes of the board.Examine form 10K.Discuss financing plans with management.Methods to Assess RiskFactors8-262003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyMaking the AcceptableAudit Risk
22、DecisionMethods to Assess RiskLikelihoodof financialdifficulties Analyze financial statements for difficulties using ratios.Examine inflows and outflows of cash flow statements.FactorsManagementintegrity See Chapter 7 for client acceptance and continuance.8-272003 Prentice Hall Business Publishing,E
23、ssentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 8Consider the impact of severalfactors on the assessmentof inherent risk.8-282003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyMajor Factors WhenAssessing Inherent Risk Nature of the clients business R
24、esults of previous audits Initial versus repeat engagement Related parties Nonroutine transactions Judgment correctly record accountbalances and transactions Makeup of the population8-292003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 9Consider
25、informationgathered to assess thelikelihood of fraud.8-302003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyAssessing Risks of Fraud8-312003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyExamples of Risks Factorsfor Fraudulent Repor
26、tingFinancial stability or profitability is threatened byeconomic,industry,or entity operating conditions.Excessive pressure exists for managementto meet debt requirements.Personal net worth is materially threatened.8-322003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/Be
27、asleyExamples of Risks Factorsfor Fraudulent ReportingThere are significant accounting estimatesthat are difficult to verify.There is ineffective oversight overfinancial reporting.High turnover or ineffective accounting internalaudit,or information technology staff exists.8-332003 Prentice Hall Busi
28、ness Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyExamples of Risks Factorsfor Fraudulent ReportingInappropriate or inefficient communicationand support of the entitys values is evident.A history of violations of laws is known.Management has a practice of making overlyaggressive or unrea
29、listic forecasts.8-342003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyResponding to theRisk of FraudDesign and perform audit proceduresto address identified fraud risk.Change the overall conduct of the auditto respond to identified fraud risk.Perform procedures to
30、 address the riskof management override of controls.8-352003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 10Discuss the relationshipof risks to audit evidence.8-362003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/Beasl
31、eyRelationship of Risk Factors,Risk,and EvidenceFactorsInfluencingRisksAcceptable audit riskControl riskInherentriskPlanneddetectionriskIDIPlannedauditevidenceDIIDD=Direct relationship;I=Inverse relationship8-372003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyChan
32、ging the Audit inResponse to Risk8-382003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyAudit Risk for Segments8-392003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyRelating Risk of Fraud toRisk Model ComponentsThe risk of fraud ca
33、n be assessedfor the entire audit or by cycle,account,and objective.Specific response could includerevising assessments of acceptableaudit risk,inherent risk,and control risk.8-402003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyTolerable Misstatement,Risks,and Bal
34、ance-related ObjectivesIt is common to assess inherent and controlrisk for each balance-related audit objective.It is not common to allocatemateriality to objectives.8-412003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyMeasurement Limitations8-422003 Prentice Hall
35、 Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyRelationships of Riskto EvidenceAcceptablePlannedAmount ofAuditInherent ControlDetection EvidenceSituation RiskRiskRiskRiskRequired1HighLowLowHighLow2LowLowLowMediumMedium3LowHighHighLowHigh4MediumMediumMediumMediumMedium5HighLowMedi
36、umMediumMedium8-432003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/Beasley Tests of Details of Balances Evidence Planning Worksheet8-442003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyLearning Objective 11Discuss how materiality and ri
37、skare related and integratedinto the audit process.8-452003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyTolerable Misstatements,Risk,and Planned EvidenceAcceptableaudit riskInherentriskControlriskTolerablemisstatementPlanneddetection riskPlannedaudit evidenceD=Dir
38、ect relationship;I=Inverse relationshipIDIIIIDD8-462003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyAudit Risk Model forEvaluating ResultsAcAR=IR CR AcDR AcAR=Achieved audit riskAcDR=Achieved detection riskIR=Inherent riskCR=Control risk8-472003 Prentice Hall Busi
39、ness Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyRevising Risksand EvidenceThe audit risk model is primarily aplanning model and is therefore oflimited use in evaluating results.Great care must be used in revisingthe risk factors when the actual resultsare not as favorable as planned.8-482003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/BeasleyEnd of Chapter 8