AUDIT PLANNING AND MATERIALITY

SUMMARY AND ASSIGNMENT

Arranged in order to comply assignment of Auditing 1 course

Arranged by
Andi Priatama Ramadhan (041811333058)

ACCOUNTING MAJOR
ECONOMIC AND BUSINESS FACULTY
ACADEMIC YEAR 2019/2020
In this chapter, contains of 5 sub-topics,

1. Audit Planning
Based on AICPA principle that the Auditor must plan the work and properly supervise
any assistants. Three main reason why the auditor should properly plan engagements :
o Enable the auditor to obtain sufficient appropriate evidence for the circumstances
o Help keeping audit cost reasonable
o Avoid missunderstanding with the client.
There are 8 part in audit planning :
 Accept client and perform initial audit planning
 Understand the client’s business and industry
 Perform preliminary analytical procedures
 Set preliminary judgement of materiality and performance materiality
 Identify significant risk due to fraud or error
 Assess inherent risk
 Understand internal control and assess control risk
 Finalize overall audit strategy and audit plan
Acceptable audit risk : measure of how willing the auditor is to accept that the financial
statement may be materially misstated after the audit is completed and an unqualified
opinion has been issued
Client Business Risk : the risk that the entity fails to achieve its objective or execute its
strategies
The risk of material misstatement : the risk that the financial statements contain a
material misstatement due to fraud or error prior to the audit.
2. Accept Client and Perform Initial Audit Planning
Initial audit planning involves four things, all of which should be done early in the audit:
o The auditor decides whether to accept a new client or continue serving an
existing one
o The auditor identifies why the client wants an audit
o The auditor obtains an understanding with the client about the term of
engagement with the Engagement Letter.
o The auditor develops the overall strategy for the audit that sets the scope, timing,
and direction of the audit and that guides the development of the audit plan.
 Select Staff for Engagement, it means the auditor must assign the appropriate
staff to the engagement to comply with auditing standards and to promote
audit efficiency.
 Evaluate the need for outside specialist, it means that if the audit requires
specialized knowledge, it may be necessary to consult a specialist.
3. Understanding the Client’s Business and Industry
The auditor should perform risk assessment procedures to obtain an understanding of
the client’s business and its enviroment to assess the risk of material misstatement in the
financial statements, including inquiries of management and analytical procedures.
There are strategic approach to understanding the client’s business and industry ;
 a) Industry and external environment
b) Business operations and processes
c) Management and governance
d) Objectives and strategies
e) Measurement and Performance
4. Perform Preliminary Analytical Procedures
Auditors are required to perform preliminary analytical procedures as part of risk
assessment procedures. One such procedure compares client’s ratio to industry or
competitor benchmarks to provide an indication of the company’s performance.
Such preliminary test can reveal unusual changes in ratios compared to prior years, or to
industry averages, and help the auditor identify areas with increased risk of misstatement.
5. Materiality in Audit
Materiality as the magnitude of misstatements that individually, or when aggregated with
other misstatement, could reasonably be expected to influence the economic decisions of
users made on the basis of the financial statements.
The preliminary judgement about materiality for the financial statement as a whole is the
maximum amount by which the auditor believes the statement could be misstated and
still not affect the decisions of reasonable users.
There are steps in applying Materiality.
 Set materiality for the financial statements as a whole
 Determine performance materiality
 Estimate total misstatement in segment
 Estimate the combined misstatement
 Compare combined estimate with preliminary or revised judgement about
materiality.
Performance Materiality is defined as the amount(s) set by the auditor at less than
materiality for the financial statements as a whole to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected misstatement exceeds
materiality for the financial statement as a whole.
We refers to the process of determining performance materiality as the allocation of the
preliminary judgement about materiality to segments in this discussion that follows.
Auditors meet three major difficulties in allocating materiality to the balance sheet
account :
Auditors expect certain accounts to have more misstatement than others
Both overstatement and understatement must be considered
Relative audit cost affect the allocation.
The purpose of allocating the preliminary judgement about materiality is:
To help the auditors decide the appropriate evidence to accumulate for each
account on financial statement
To minimize audit cost without sacrifing audit quality
The misstatement in an account can be of two types
o Known misstatement are those where the auditor can determine the amount of
the misstatement in the account
 o Likely misstatement are arised from differences between management’s and the
auditor’s judgment about estimates of account balances. In another case,
projection of misstatement based on the auditor’s test of sample from a
population
The allowance for Sampling risk result because the auditor has sampled only a
portion of the population and there is a risk that the sample doesn’t accurately
represent the population.
 ANSWER
MULTIPLE CHOICE QUESTIONS
(AUDITING-HANDBOOK-PAGES 194-196)
6-20
a. (2)
b. (2)
c. (1)
6-21
a. (1)
b. (2)
c. (1)
6-22
a. (3)
b. (2)
c. (4)