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Easy understanding about the audit risk materiality
1. 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.
2. 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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