Module Name Auditing II

Module Code ACC309

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Lecturer Name Dr. Yasmine Magdi
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 Course Content
Chapter (1): Materiality and Discuss risk in auditing and study the concept of materiality to
Audit Risk the audit

Discuss the purposes of analytical procedures and the timing of

Chapter (2): Analytical
each purpose and select the most appropriate analytical
Procedures
procedures.

Chapter (3): Statistical and

Deals with nonstatistical and statistical sampling methods for
Nonstatistical Sampling Tools
tests of controls and substantive tests of transactions.
for Auditing

Chapter (4): Information Discuss the different issues related to using information 3
Technology and Auditing technology on auditing process.
 Chapter 1

Materiality and Audit Risk

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 Materiality

Major consideration in determining the appropriate audit report

Referenced in audit report’s scope paragraph

What is meant by the term “material”?

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 Materiality

Materiality is the magnitude of an omission or misstatement of

accounting information that, in the light of surrounding circumstances,

makes it probable that the judgment of a reasonable person relying on

the information would have been changed or influenced by

the omission or misstatement.

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 Materiality

Auditor’s responsibility = determine whether financial statements

are materially misstated.

Auditor will bring material misstatements to the client’s attention

so corrections can be made.

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 Materiality
Steps in Applying Materiality

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 Materiality
Steps in Applying Materiality
1. Set Preliminary Judgment About
Materiality

Auditors set materiality thresholds early in the

engagement.

Thresholds represent the maximum statements

that could be misstated and still not affect 9
users decisions.
 Materiality
Steps in Applying Materiality
1. Set Preliminary Judgment About Materiality
Preliminary Judgment about Materiality= Percentage of the Benchmark

Some examples of percentages applied to benchmarks that might be considered include the
following:
• For a profit oriented entity, 3 to 5 percent of profit before tax from continuing operations,
or 0.5 percent of total revenues.
• For a not-for-profit entity, 0.5 percent of total expenses or total revenues. 10
• For an entity in the mutual fund industry, 0.5 percent of net asset value.
 Materiality
Steps in Applying Materiality
1. Set Preliminary Judgment About Materiality
Preliminary Judgment about Materiality= Percentage of the Benchmark

Some examples of percentages applied to benchmarks that might be considered include the
following:
• For a profit oriented entity, 3 to 5 percent of profit before tax from continuing operations,
or 0.5 percent of total revenues.
• For a not-for-profit entity, 0.5 percent of total expenses or total revenues. 11
• For an entity in the mutual fund industry, 0.5 percent of net asset value.
 Materiality
Steps in Applying Materiality

1. Set Preliminary Judgment About Materiality

Factors Affecting Judgment

Materiality is a relative rather than an absolute concept.

Bases are needed for evaluating materiality.

Qualitative factors also affect materiality. 12

 Materiality
Steps in Applying Materiality
2. Allocate Preliminary Judgment
About Materiality to Segments
Evidence is accumulated by segments
rather than for the financial statements
as a whole.

Most practitioners allocate materiality

to balance sheet accounts. 13
 Materiality
Steps in Applying Materiality
2. Allocate Preliminary Judgment
About Materiality to Segments
Evidence is accumulated by segments
rather than for the financial statements
as a whole.

Most practitioners allocate materiality

to balance sheet accounts. 14
 Materiality
Steps in Applying Materiality
Evaluating Results
Known and Likely Misstatements

Auditor can determine the misstated amount in an account

(“Known”)

Two types of “Likely” misstatements:

 Judgmental differences
 Projections of misstatements from 15
audit samples
 Materiality
Steps in Applying Materiality
3. Estimate Total Misstatement in the Segment
Direct Projection Estimate of Misstatement= (Net Misstatement in the Sample*/ Total
Sampled) × Total Recorded Population Value

*Net Misstatement in the Sample= The Total Value before Audit – The Total
Value after Audit
Sampling Error= Direct Projection Estimate of Misstatement × Estimate for Sampling
Error
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 Materiality
Steps in Applying Materiality
3. Estimate Total Misstatement in the Segment
Direct Projection Estimate of Misstatement= (Net Misstatement in the Sample*/ Total
Sampled) × Total Recorded Population Value

*Net Misstatement in the Sample= The Total Value before Audit – The Total
Value after Audit
Sampling Error= Direct Projection Estimate of Misstatement × Estimate for Sampling
Error
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 Materiality
Steps in Applying Materiality
4. Estimate the Combined Misstatement
5. Compare Combined Estimate with Preliminary
Judgment about Materiality
When the estimated misstatements are less than or equal to the judgment about materiality, the
auditor can conclude that the financial statements are fairly presented. Conversely, when the
estimated misstatements are greater than judgment about materiality, the auditor should request
that the client adjust the financial statements. If the client refuses to adjust the financial
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statements for the likely misstatements, the auditor should issue a qualified or adverse opinion
because the financial statements do not present fairly in conformity with GAAP.
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