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Assessing the
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Risk of
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Material
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Misstatement
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Krisler Ompusunggu
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Online Class
Unsoed S1
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Subject Audit I

21 May 2021
Ground Rules
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1. Your video should be always turned
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ON – a cool background is strongly
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recommended
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2. Check-in your attendance at the
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given channel n s
https://forms.gle/wR9ZRKvL47nCBp7
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W6
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3. Active participation
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Our Topics This Semester
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Before Mid
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• Audit Reports
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• Audit Evidence
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After Mid
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• Audit Planning and Materiality
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• Assessing the Risk of Material Misstatement
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• Assessing and Responding to Fraud Risks
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• Internal Control and COSO Framework

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Agenda 21
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1 Evaluating Materiality
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Assessing RoMM
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Auditor’s Responses
to Assessed Risks
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Let’s Try to Asses
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Evaluating
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Materiality d 2
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Overview of audit process
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Planning and
Test of control
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understanding

so
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Issuing audit
report
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Drafting
report

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What is Material?
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• Misstatements are considered to be material ay
if they, individually or in the aggregate, could
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reasonably be expected to influence the
economic decisions of users taken on the
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basis of the financial statements,
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• Judgments about materiality are made in light
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of surrounding circumstances, and are
affected by the size or nature of a
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misstatement, or a combination of both, and

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• Judgments about matters that are material to
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users of the financial statements are based
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on a consideration of the common financial
information needs of users as a group.
When do we apply materiality
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Collect evidence
Identify
misstatements
Recap
misstate
d 2 Evaluate
scope
Forming
an
ments

o e opinion

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Meet
criteria?

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?
within
scope?

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Familiar with them?
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Quantitative Approach: Extended
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company, whichever

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Materiality x Scope Evaluation
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An judgement amount where financial information has the ability
Materiality
to affect economic decisions of users or the discharge of

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accountability by management or those charged with governance

25,000
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if the part of the information is misstated, omitted or not disclosed

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An judgement amount determined by the auditor, based on the
assessed level of risk at the financial statement level, which is less
Performance
Materiality
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than materiality for the financial statements as a whole. The

23,500
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amount of performance materiality is considered necessary to
reduce to an appropriately low level the probability that the

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aggregate of uncorrected and undetected misstatements is greater
than materiality

Gap
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Difference between Materiality and Performance Materiality, which

d i t allocated as the anticipated uncorrected misstatements. The gap

will be carried forward to future audit.

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1,500
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Assessing ay
RoMM 2 M
(ISA 315)
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Management assertions as criteria
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Transactions and events
the transactions recorded have actually taken
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Occurrence place
all transactions that should have been recorded
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Completeness

Accuracy
have been recorded

d
the transactions were recorded at the appropriate 2
amounts

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the transactions have been recorded in the
Cutoff
s
correct accounting period

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the transactions have been recorded in the
Classification
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appropriate caption

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I C Existence assets, liabilities and equity balances exist

d i t Rights and Obligations

entity legally controls rights to assets and
liabilities faithfully represent its obligations

A u Completeness

Valuation and Allocation

all balances that should have been recorded
have been recorded
in the financial statements are properly valued
and allocated in proper period
Audit is …
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“… not testing of all accounts
in Financial Statements soe d 2 2

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… a risk-based approach“
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Determine RoMM in significant accounts
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Identify material classes of transactions, account balances and
disclosures
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Determine the risk of material misstatement
in significant accounts as result from the

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identification before

Quantitative
d 2
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n sBalance exceed the
Risk of Material
Misstatements in

s U performance
materiality (PM)
significant accounts
•
•
Existence / occurrence

s
Completeness
Perspectives
• Accuracy

C la Fluctuation from PY
exceed PM
•
•
•
Cutoff
Classification
Rights and Obligations

i t I • Valuation and Allocation

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Qualitative Approach
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The transactions are Involves a wide range of
A fraud risk
measurement uncertainty

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complex

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Related to recent

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significant economic,
accounting, or other
s Involves significant
transactions with related
Involves significant
transactions that are

C
outside the normal course
developments and requires parties
of business of the entity

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specific attention

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Identify material classes of transactions, account balances and disclosures
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Performance Materiliaty IDR xxx

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FS Line Balance
Current year Prior year
Quantitatively
significant?
Qualititatively
significant?
Qualitative
Consideration

ayConcluded as
significant?

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IDR IDR (Y / N) (Y / N) (Y / N)
ASSETS

2
Current Assets
Cash and cash equivalents xxxx xxxx Y N Y
Trade receivables
Related parties
Third parties
xxx
xxxx
xxx
xxxx
Y
Y

d
Y
N
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Transaction to related parties Y
Y

e
Inventory xxxx xxxx Y N Y
Prepaid expenses xxx xxx Y N Y
Prepaid taxes
Advances
xx
xx
xx
xx

so N
N
Y
N
Compliance to regulation Y
N

n
Noncurrent Assets
Plant property and equipments xxxxx xxxxx Y N Y

LIABILITIES AND EQUITY

Current Liabilities

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Trade payables
Related parties xxx xxx Y Y Transaction to related parties Y

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Third parties xxxx xxxx Y Y Potential understatement Y
Accrued expenses xxx xxx Y Y Involves estimates Y

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Tax payables xx xx N Y Compliance to regulation Y
Other payables xx xx N N N

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Employee benefits - current portion

Long term loan - current portion

xx

xxx
xx

xxx
N

Y
Y

N
Compliance to regulation, involves
estimates
Y

d
Noncurrent Liabilities
Employee benefits xxxx xxxx Y Y Compliance to regulation, involves Y

u
estimates
Long term loan xxxx xxxx Y N Y

A Equity
Capital stock
Retained earnings
xxxx
xxxx
xxxx
xxxx
Y
Y
N
N
Y
Y
Identify material classes of transactions, account balances and disclosures
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y
Performance Materiliaty IDR xxx

Revenues
FS Line

IDR
Balance
Current year Prior year

IDR
Quantitatively
significant?
(Y / N)
Qualititatively
significant?
(Y / N)
Qualitative
Consideration

M a
Concluded as
significant?
(Y / N)

Sales xxxx xxxx Y Y

parties

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Includes transactions to related Y

d
Cost of Sales
Includes transactions to related

e
Raw material xxxx xxxx Y Y Y
parties

o
Direct labor xxx xxx Y N Y

s
Depreciation xxx xxx Y N Y

n
Other manufacturing expenses xx xx N N N
Goods in process xxx xxx Y N Y

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Finished goods xxxx xxxx Y N Y

s
Operating Expenses - Selling

s
Promotion xxx xxx Y N Y

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Salaries and benefits xxx xxx Y N Y
Royalty fees xx xx N Y Transaction to related parties Y
Depreciation xxx xxx Y N Y

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Travel and transportation
Operating Expenses - G&A
xx xx N N N

t
Salaries and benefits xxx xxx Y N Y

d i
Depreciation
Professional fees
xxx
xxx
xxx
xx
Y
Y
N
Y Significant increase from PY,
potential liability from litigation
Y
Y

A u Other income/expenses
Other income
Other expenses
Tax expenses
x
xx
xx
x
x
xx
N
N
N
N
Y
Y
Significant increase from PY
Compliance to regulation
N
Y
Y
Elaborating qualitative aspect
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• Understanding the entity and its environment ay
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• Review media coverages

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• Discussion with senior managements and employees

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• Internal control within the entity
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•
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Information system and IT

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•
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Analytical procedures which promotes the use of Data Analytics
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Auditor’s ay
Responses 2 M
to Assessed d 2
Risks oe
(ISA 330) n s
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Impact of significant risk to procedure
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Identify material classes of transactions, account balances
and disclosures
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Determine the risk of material
misstatement in significant accounts as

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result from the identification before

2
Quantitative
d 2
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n s Risk of Material

UBalance exceed Misstatements (RoMM) in

the performance significant accounts Develop
Perspectives

s
• Existence / occurrence procedures
materiality (PM) •

s
Completeness that address
• Accuracy

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• Cutoff
RoMM in
• Classification significant

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Fluctuation from • Rights and Obligations accounts
PY exceed PM • Valuation and Allocation

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A
Audit program – Significant risk
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Audit program – Significant risk
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Audit program – No significant risk
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Traditional control testing vs DA
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Traditional Control Testing

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Design Risks/Controls
Mapping
Random Control Sampling of
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Identify Sample Failures

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Design Risk
Prioritize
Transaction Identify Control

t
Indicator

d i Framework
Samples based
on Risk
Failures

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Tests of Controls
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Inquiry

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Walk Through Reperformance

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Tests of Controls
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Inquiry

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Walk Through Reperformance

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Substantive Procedures
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Seeking information of knowledgeable
persons, both financial and non-

Inquiry
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the entity

d 2 Evaluations of financial information

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through analysis of plausible

o
Analytical procedures relationships among both financial
01
s
and non-financial data

02
Un Examining records or documents,
whether internal or external, in

03 ss Inspection paper form, electronic form, or other

media, or a physical examination of

04
C la an asset.

i t I External Confirmation Obtaining a written direct response

from a 3rd party in paper, by
electronic or other medium

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Substantive Procedures (cont’d)
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Looking at a process or procedure
being performed by others, for

Observation
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inventory counting by the entity’s

d
personnel

o e Checking the mathematical accuracy

05
n s Recalculation of documents or records.
Recalculation may be performed
manually or electronically

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s U Involves the auditor’s independent

07
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controls that were originally

C
performed as part of the entity’s

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internal control

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Developing substantive tests
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Consideration:
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• Nature of Account
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• BS/PL?
• Computation method?
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• Involving estimate?
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• Timing – interim / year-end?
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• Extent – partial / full?
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Developing audit program - Cash
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Existence
Assertions for cash

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Cash balances on the balance sheet really

Rights and Obligations

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exist at the reporting date.
The company has title to the cash accounts

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as of the reporting date
Completeness
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Cash balances include all cash transactions

U
that have occurred during the accounting
period.

s
Valuation and Allocation s The recorded balances reflect the true

C la underlying economic value of the cash and

cash equivalents

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Presentation and disclosure
i
Cash is properly classified on the balance

u d sheet and adequate disclosure has been

made in the notes to the financial statements

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Cash and Cash Equivalent
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• Bank confirmation ay
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• Bank reconciliation
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• Cash-opname
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• Roll-backward/forward procedures
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Let’s Try to ay
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Case study (30 minutes)
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1. You are the auditor of a company listed in the IDX
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<pick a listed company, should be unique>
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2. Look for the company financial statements YE 31
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December 2020
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3. After your re-determine the materiality and
s
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performance materiality (quantitatively), perform
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identification of material classes of transactions,
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account balances and disclosures
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4. Prepare documentation for discussion
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 Recap 21
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1 Evaluating Materiality
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2 Assessing RoMM
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Auditor’s Responses
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3 to Assessed Risks

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Q&A 21
Q&A
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 21
Thank you!
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