Materiality and Risk(英文版)(ppt 66页).pptx

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1、9-1Materiality and RiskChapter 99-2Auditing DefinitionnAuditing reduces information risk to a socially acceptable level.nTo accomplish this,nSet materiality(yardstick)nManage risks.9-3MaterialityThe auditors responsibility is todetermine whether financialstatements are materially misstated.If there

2、is a material misstatement,the auditor will bring it to the clientsattention so that a correction can be made.9-4MaterialitynInformation is material when it is likely to influence the economic decisions of financial statement users.nPlanning materiality(preliminary judgment)is the largest amount of

3、uncorrected dollar misstatement that could exist in published financial statements and still fairly present financial statements in conformity with GAAP.nTolerable misstatement is the amount an account can be off and still be considered fairly stated.9-5Steps in ApplyingMaterialityStep1Set prelimina

4、ryjudgment aboutmateriality.Step2Allocate preliminaryjudgment aboutmaterialityto segments.Planningextentof tests9-6Steps in ApplyingMaterialityStep3Estimate totalmisstatement in segment.Step4Estimate thecombined misstatement.EvaluatingresultsCompare combinedestimate with judgmentabout materiality.St

5、ep59-7Auditors use materiality to:nPlan the audit,directing attention,determining the nature,timing and extent of procedures to be performed.nEvaluate the evidence,something to measure againstnGuide for decisions about audit reportPlanning Materiality is determined prior to evidence gathering9-8Dete

6、rmining Whats MaterialnNot required to define materiality as a specific dollar amount.nRule of thumb for materiality is under 5%is not material where over 10%would be material.nAuditors judgment determines materiality9-9Factors that affect auditors judgement on materialitynAbsolute size-half a milli

7、onnRelative size-in relation to F/S such as 5%of net income.nQualitative aspects(nature)-management fraud v.s.employee fraudnCircumstances-what will F/S be used for,how widely publishednUncertainty-lower materiality level because of risk of being wrong.nCumulative error-errors may accumulate into a

8、material error9-10Preliminary Assessment of MaterialityHelps the auditor avoid surprises such as:nNot auditing enough-litigation nAuditing too much-costlynFine tunes the audit for effectiveness and efficiency.9-11Assigning Materiality to AccountsnTop Down,define total materiality and divide amongst

9、the accountsnBottoms-up,assign materiality to each account and add the amounts to get total materiality for the F/S.nThe amount assigned to the account is the tolerable misstatement.9-12Allocate Preliminary Judgment About Materiality to SegmentsThis is necessary because evidence isaccumulated by seg

10、ments rather thanfor the financial statements as a whole.Most practitioners allocate materialityto balance sheet accounts.SAS 39(AU 350)9-13Estimated TotalMisstatement ExampleNet misstatement of the sample$3,500$50,000$450,000=$31,500Total sampledTotal recorded population valueDirect projection esti

11、mate of misstatement=9-14Example of Estimatefor Sampling ErrorTolerable Direct SamplingAccount Misstatement Projection Error TotalCash$4,000$0$N/A$0Accounts receivable 20,000 12,000 6,000*18,000Inventory 36,000 31,500 15,750*47,250Total estimated misstatement amount$43,500$16,800$60,300Preliminary j

12、udgment about materiality$50,000*estimate for sampling error is 50%9-15Analytical Procedures can help determine materialitynMathematical analysis of the F/SnRequired as part of planning and review for an audit.nAttention DirectingnHelps to reduce risk.9-16RiskAuditors accept some level of riskin per

13、forming the audit.An effective auditor recognizes thatrisks exist,are difficult to measure,and require careful thought to respond.Responding to risks properly is criticalto achieving a high-quality audit.9-17Managing Risk using the ModelnAudit Risk=Inherent Risk x Control Risk x Detection RisknAR=IR

14、 x CR x DR9-18Inherent RisknThe risk that material misstatements have entered the accounting system.nBased on type of business,environment,type of management,etc.nWhat errors could occur?9-19Control RisknControl risk is the probability that the clients internal control activities will fail to detect

15、 material misstatements.nWhat has client done to mitigate inherent risks?9-20Detection Risk nThe probability that audit procedures will fail to produce evidence of material misstatements.nThis is the only part of the risk model the auditor controls by planning the nature,timing and extent of audit p

16、rocedures.9-21Audit Risk nThe risk that an auditor will issue an inappropriate opinion.nManage audit risk by nEvaluating the clients inherent and control risknAdjusting audit procedures(detection risk)9-22Who Controls the RisksnThe auditor controls the audit risk by controlling detection risk.nInher

17、ent and control risk are controlled by the client and the business the client is in.9-23Anchoringn Anchoring is the auditor using a carryover view of the clients internal control structure from previous audits.nHow does this affect the audit?9-24Inherent Risk is affected bynEconomic conditions such

18、as asset valuations,offsetting assets and liabilities,changes in deferral policies,compliance with covenants.nComplexity of transactions.nType of business,type of ownership,size of businessnRelative risk,some accounts are riskier than others.9-25Major Factors WhenAssessing Inherent Risk Nature of th

19、e clients business Results of previous audits Initial versus repeat engagement Related parties Nonroutine transactions Judgment correctly record accountbalances and transactions Makeup of the population9-26Planning the AuditnThe auditor uses the knowledge of the clients business to make preliminary

20、assessments of the clients inherent and control risk.nThese are preliminary risk assessments prior to gathering evidence.nRisk is updated throughout the audit as needed based on the findings.9-27Audit Risk OverallnThe probability of giving an incorrect opinion on financial statements as a whole.nOn

21、an individual item like accounts receivable,it is the risk that a material misstatement occurs beyond an acceptable level.nAcceptable level is defined by materiality9-28Risk and EvidenceAuditors gain an understanding of theclients business and industry andassess client business risk.Auditors use the

22、 audit risk model to furtheridentify the potential for misstatementsand where they are most likely to occur.9-29Example of DifferingEvidence Among CyclesSales andCollectionCycleAcquisitionand PaymentCyclePayroll andPersonnelCycleInherentriskControlriskAcceptableaudit riskPlanneddetection riskABCDmed

23、iumhighlowmediumlowlowlowlowlowmediummediumhigh9-30Example of DifferingEvidence Among CyclesInventory andWarehousingCycleCapital Acquisitionand RepaymentCycleInherentriskControlriskAcceptableaudit riskPlanneddetection riskABCDhighlowhighmediumlowlowlowmedium9-31Audit Risk Modelfor PlanningPDR=AAR (I

24、R CR)PDR=Planned detection riskAAR=Acceptable audit riskIR=Inherent riskCR=Control risk9-32Impact of Engagement Riskon Acceptable Audit RiskAuditors decide engagement risk and usethat risk to modify acceptable audit risk.Engagement risk closely relates toclient business risk.9-33Factors AffectingAcc

25、eptable Audit RiskThe degree of which external usersrely on the statementsThe likelihood that a client will havefinancial difficulties after theaudit report is issued9-34Factors AffectingAcceptable Audit RiskThe auditors evaluation of managements integrity9-35Making the AcceptableAudit Risk Decision

26、Methods to Assess RiskExternal usersreliance onfinancialstatements Examine financial statements.Read minutes of the board.Examine form 10K.Discuss financing plans with management.Factors9-36Making the AcceptableAudit Risk DecisionMethods to Assess RiskLikelihoodof financialdifficulties Analyze finan

27、cial statements for difficulties using ratios.Examine inflows and outflows of cash flow statements.FactorsManagementintegrity See Chapter 8 for client acceptance and continuance.9-37SAS 99:Consideration of Fraud in a Financial Statement Audit9-38Overall RequirementAn audit should be planned and perf

28、ormed to obtain reasonable assurance about whether the financial statements are free of material misstatements,whether caused by error or fraud.An audit requires due professional care,which in turn requires that the auditor exercise professional skepticism.9-39Causes of Misstatements Causes Errors F

29、raud Fraudulent Misappropriation Financial of Assets Reporting9-40Two Types of Fraud Considered in an AuditnFraudulent financial reporting(“cooking the books”)-examplesnFalsification of accounting recordsnOmissions of transactionsnMisappropriation of assets-examples:nTheft of assetsnFraudulent expen

30、ditures9-41Professional SkepticismnAn attitude that includes a questioning mind and a critical assessment of audit evidencenThe engagement should be conducted recognizing possibility of material misstatement due to fraudnAn auditor should not be satisfied with less than persuasive evidence9-42Termin

31、ology SimplificationTo simplify the display,we will abbreviate the term used in the standard“risk of material misstatement due to fraud”as follows:Risk of materialmisstatement=Risk of frauddue to fraud 9-43Fraud Conditions(“Fraud Triangle”)Incentive(Pressure)Opportunity Rationalization (Attitude)9-4

32、4Examples of Risks Factorsfor Fraudulent ReportingFinancial 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.9-45Examples of Risks Factorsfor Fraud

33、ulent 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.9-46Examples of Risks Factorsfor Fraudulent ReportingInappropriate

34、 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 unrealistic forecasts.9-47Steps involved in Considering the Risk of Fraud1.Staff discussion2.Obtain information needed to identif

35、y risks3.Identify risks4.Assess identified risks5.Respond to results of assessment6.Evaluate audit evidence7.Communicate about fraud8.Document consideration of fraud9-48Step 1Staff Discussion of theRisk of FraudnBrainstormnConsider how and where financial statements might be susceptible to fraudnExe

36、rcise professional skepticism9-49Step 2Obtain information needed to identify risk of fraudnInquiries of management,the audit committee,internal auditors and othersnConsider results of analytical proceduresnConsider fraud risk factorsnConsider other information9-50Step 3Identify Risks that may Result

37、 in Fraud and ConsidernType of risknSignificance of risk(magnitude)nLikelihood of RisknPervasiveness of risk9-51Step 4Assess the identified risks after considering programs and controls nConsider understanding of internal controlnEvaluate whether programs and controls address the identified risksnAs

38、sess risks taking into account this evaluation9-52Step 5Respond to Results of the AssessmentAs risk increasesnOverall responsesnMore experienced staffnMore attention to accounting policiesnLess predictable proceduresnSpecific responsesnConsider need to increase evidence by altering the nature,timing

39、 and extent of audit procedures9-53Step 5Respond to Results of the Assessment(concluded)nOn all audits,the auditor should consider the possibility of management override of controls and examine:nAdjusting journal entriesnAccounting estimatesnUnusual significant transactions9-54Step 6Evaluate Audit E

40、videncenAssess risk of fraud throughout the auditnEvaluate analytical procedures performed as substantive tests and at overall review stagenEvaluate risk of fraud near completion of fieldworknRespond to misstatements9-55Step 7Communicate about FraudnCommunicatenAll fraud to an appropriate level of m

41、anagementnAll management fraud to audit committeenAll material fraud to management and audit committeenDetermine if reportable conditions related to internal control have been identified;communicate them to the audit committee9-56Document Consideration of FraudnDocument steps 1-7nStaff discussionnIn

42、formation used to identify risk of fraudnFraud risks identifiednAssessed risks after considering programs and controlsnResults of assessment of fraud risknEvaluation of audit evidencenCommunications requirementsnIf improper revenue recognition was not considered a risk,why it wasnt9-57Relationship o

43、f Risk Factors,Risk,and EvidenceFactorsInfluencingRisksAcceptable audit riskPlanneddetectionriskPlannedauditevidenceInherentriskControl riskIDIIDIDD=Direct relationship;I=Inverse relationship9-58Changing the Audit in Response to Risk9-59Audit Risk for Segments9-60Relating Risk of Fraud toRisk Model

44、ComponentsThe risk of fraud can be assessedfor the entire audit or by cycle,account,and objective.Specific response could includerevising assessments of acceptableaudit risk,inherent risk,and control risk.9-61Tolerable Misstatement,Risks,and Balance-related ObjectivesIt is common to assess inherent

45、and controlrisk for each balance-related audit objective.It is not common to allocatemateriality to objectives.9-62Measurement Limitations9-63Relationships of Riskto EvidenceAcceptablePlannedAmount ofAuditInherent ControlDetection EvidenceSituation RiskRiskRiskRiskRequired1HighLowLowHighLow2LowLowLo

46、wMediumMedium3LowHighHighLowHigh4MediumMediumMediumMediumMedium5HighLowMediumMediumMedium9-64 Tests of Details of Balances Evidence Planning Worksheet9-65Revising 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.9-66End of Chapter 9