MATERIALITY AND AUDIT RISK

Koko Bustami

Cut Rusmina
presented by

Cindi Paramita Februari

AGENDA

1. Definition of Materiality
2. Preliminary considerations on materiality
3. Relationship between materiality and audit evidence
4. Audit Risk

1. Definition of Materiality

Financial Accounting Standards

Board defines materiality
(materiality) as: "The amount of a
waiver or misstatement of
accounting information that, outside
of his surroundings, allowing that
the consideration of a person who
relies on the information would be
changed or affected by the neglect
or misstatements.

2. Preliminary considerations on materiality

In planning an audit, the auditor should assess materiality at the following two
levels:
1. The level of the financial
statements, because the
auditor's opinion on the fairness
extends to the financial
statements as a whole.

2. The level of account balances,

since auditors test the account
balance to obtain the overall
conclusion on the fairness of the
financial statements

The factors to be considered in making a preliminary judgment about materiality at

each level are as follows:

Materiality in Financial Statements Level

Materiality of the financial statements is a minimum

aggregate misstatement in a financial statement that is
quite important to prevent statements are presented
fairly in accordance with accounting principles generally
accepted.

The factors to be considered in making a preliminary judgment about materiality at

each level are as follows:

Materiality at the level of Account Balance

Account balance materiality is "a minimum misstatements

that may occur in an account balance is considered to
contain a material misstatement. Misstatement to the
level known as the tolerable misstatement.

The factors to be considered in making a preliminary judgment about materiality at

each level are as follows:

Allocating
accounts

Materiality

in

Financial

Statements

of

When the auditor's preliminary judgment about

materiality of the financial statements to be quantified, a
preliminary assessment of the materiality of each account
can be obtained by allocating materiality to the financial
statements on individual accounts. The allocation can be
done either on the balance sheet accounts and the
accounts of the income statement.

3. Relationship between materiality and audit evidence

Materiality is one among the various

factors that affect the auditor's
judgment about the adequacy (quantity)
of audit evidence.

4. AUDIT RISK

"The risk of an audit (audit risk) is the risk that the auditor may
have inadvertently failed to appropriately modify the opinion on
financial statements contain material misstatements (Boynton,
2003)".
The overall concept of the audit risk is the opposite of the
concept of reasonable assurance. The higher certainty to be
obtained in the auditor's opinion correctly states, the lower the
audit risk he would receive.

5. Risk level of financial statement audit and account balance rate

Audit risk, such

as materiality
is divided into
two parts:

1. The overall audit risk associated with

the financial statements as a whole.
2. Individual audit risk associated with
each individual account balances are
included in the financial statements.

6. Elements / components of audit risk

1.

Inherent risk

Statement on Auditing Standards (AU 312.27) defines

the default risk is as follows: "the susceptibility of an
assertion to the possibility that a material
misstatement, assuming there are no related internal
controls.

6. Elements / components of audit risk

2.

Control Risk

Statement on Auditing Standards (AU 312.27) defines

the default risk is as follows: "the susceptibility of an
assertion to the possibility that a material
misstatement, assuming there are no related internal
controls.

6. Elements / components of audit risk

3.

Detection Risk

Statement on Auditing Standards (AU 312.27) define the

risk of detection as follows: "Audit risk (detection risk) is
the risk that the auditor will not detect a material
misstatement that exists in an assertion (Boynton, 2003)".

7. Relationships between components of risk

Risk detection has an inverse relationship with the risk

inherent and control. The smaller the inherent risk and
control risk are believed by the auditor, the greater the
risk of detection is acceptable. Conversely, the greater
the risk inherent and control risk is believed by the
auditor, the smaller the degree of detection risk is
acceptable.

8. Relationship between materiality, audit risk and audit evidence

Various possibilities for the relationship between materiality, audit evidence, and
audit risk is described as follows:
1

Increase the level of materiality, while maintaining the amount of

audit evidence collected.

Increase the amount of audit evidence collected, while the

materiality levels were maintained.

Adding a little amount of audit evidence and the level of materiality

dikumpukan together.