Module 6 (Main Audit Concepts and Planning the Audit)

Problem 6-1:
a dan b

c. Rule of thumb
Problem 6-2:

a. There are no clear-cut guidelines as to the appropriate preliminary estimates of

materiality. These are matters of the auditor’s professional judgement. The following
guidelines are set based on judgement.

b. The lowest materiality level in sub question A was $ 184.05 million (0.5% of sales),
which is much higher than the bonuses that have been paid out to the CEO and CFO.
However, that does not imply that you can skip the audit of the bonuses paid out and
ignore a $ 30K misstatement, because the amounts are immaterial. Shareholders, as
users of the financial statements, are known to be (very) interested in the compliance
with the remuneration package that was agreed previous year. Because of that, the
bonuses become a material part of your audit. Any misstatement in the bonuses are
material from a qualitative perspective.

c. An auditor must be satisfied that the actual estimate of misstatements is less than the
preliminary judgement about materiality. If actual error is more than the auditor’s
initial judgement about materiality, the auditor would reevaluate the preliminary
judgement. The auditor would likely require an adjusting entry or an expansion of
certain audit tests.

Problem 6-3:
Dag Nilsson, Auktoriserad Revisor (AR), considers the audit risk at the financial
statement level in the planning of the audit of the financial statements of Lycksele Lappmark
Bank (LLB) in Storuman, Sweden, for the year ended December 31, 20X5. Audit risk at the
financial statement level is influenced by the risk of material misstatements, which may be
indicated by a combination of factors related to management, the industry and the entity. In
assessing such factors, Nilsson has gathered the following information concerning LLB’s
environment.
LLB is a nationally insured bank and has been consistently more profitable than the
industry average by making mortgages on properties in a prosperous rural area, which has
experienced considerable growth in recent years. LLB packages its mortgages and sells them
to large mortgage investment trusts. Despite recent volatility of interest rates, LLB has been
able to continue selling its mortgages as a source of new lendable funds.
LLB’s board of directors is controlled by Kjell Stensaker, the majority stockholder,
who is also the chief executive officer (CEO). Management at the bank’s branch offices has
authority for directing and controlling LLB’s operations and is compensated based on branch
profitability. The internal auditor reports directly to Hakon Helvik, a minority stockholder,
who is chairman of the board’s audit committee.
The accounting department has experienced little turnover in personnel during the
five years Nilsson has audited LLB. LLB’s formula consistently underestimates the
allowance for loan losses, but its controller has always been receptive to Nilsson’s
suggestions to increase the allowance during each engagement.
During 20X5, LLB opened a branch office in Ostersund, 300 km from its principal
place of business. Although this branch is not yet profitable due to competition from several
well established regional banks, management believes that the branch will be profitable by
20X7.
Also during 20X5 LLB increased the efficiency of its accounting operations by
installing a new computer system.