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PLANNING
AND
MATERIALITY
CHAPTER 8
2. Client business risk: The risk that the entity fails to achieve its
objectives or execute its strategies.
4. The auditor develops the overall strategy for the audit, including
engagement staffing and any required audit specialists.
Select Staff for Engagement and Evaluate Need for Outside Specialists
The CPA firm must select staff for the engagement who are knowledgeable
about the client’s business. If the CPA firm lacks expertise, they may need to
hire outside specialists.
• Accounting policies
If the client has set unreasonable objectives, especially when employees are
incentivized to meet performance goals, there may be an incentive for
aggressive accounting, which increases the risk of financial statement
misstatement.
There are five steps to applying materiality as noted in Figure 8-5. The
first two are part of the planning process.
The last three steps in applying materiality are illustrated in Table 8-2.