FINANCIAL STATEMENT AUDIT ENGAGEMENT

AUDIT PLANNING
ASSESSING RISK OF MATERIAL MISSTATEMENT
AND RESPONDING THERETO

Part 2 of 2

RO/RGO301
RO/RGO351
ROV301/RGOV301
 OVERVIEW OF THE PLANNING STAGE OF THE AUDIT
PROCESS

Respond to Identified Risks

 Obtain an updated knowledge of business

 Obtain an understanding of accounting and internal control systems

 Consider Audit risk , Assess the Risk of material misstatement

 Determine Materiality

 Formulate Audit Strategy and Audit Plan

Recap
What is Materiality ?
How is materiality Calculated ?
 MATERIALITY – WHEN IS IT CALCULATED?

Planning stage Responding to assessed End of responding to

risk stage assessed risk stage

Set Planning Set Final

Perform audit procedures
materiality materiality and compare
and identify misstatements
misstatements thereto

Planning Materiality Final Materiality

Performance Materiality

Based on the following total, what would you

consider an appropriate materiality level?

Revenue R20 000 000 (as disclosed in income statement)

The audit process is based on the ISA’s
STAGES IN THE AUDIT PROCESS
 LINK BETWEEN MATERIALITY AND RISK

There is an inverse relationship between materiality and ROMM:

 If
ROMM is assessed as high, a low materiality will be set to
compensate for the high risk.

 If
ROMM is assessed as low, a high materiality will be set because there
is a smaller chance that a material misstatement will occur.

WHY ?
 AUDIT STRATEGY AND AUDIT PLAN EXPLAINED
Audit Risk must always be kept to an acceptable level for all audits!
As an auditor – you need to minimize the chance of expressing an
inappropriate opinion on the FS

How Do We Do That?

• By adopting an appropriate audit strategy and plan

• By assigning the right to the audit team (experienced and
competent)
• By the team exercising professional scepticism
• By putting in proper supervision and review procedures

All these things will reduce the risk of failing to detect the misstatement which
you expect (due to high inherent risk and control risk) to an acceptable level.
Remember that detection risk is controllable, unlike inherent and control risk.
 OVERVIEW OF THE PLANNING STAGE OF THE AUDIT
PROCESS

 Obtain an updated knowledge of business

 Obtain an understanding of accounting and internal control systems

 Consider Audit
risk , Assess the Risk of material misstatement
 Determine Materiality

 Formulate Audit Strategy and Audit Plan

 AUDIT STRATEGY – RESPOND TO RISK

Having obtained the understanding of the entity an auditor can determine

the resources needed to complete the audit

Scope of the engagement (nature and size of client)

Reporting objectives (timing - deadlines)
Direction (supervision & review)
 AUDIT PLAN – RESPONSES TO ASSESSED TO RISK

Overall responses to the risks (once the auditor has ID and assessed the
ROMM in the FS)

Develop an audit plan that responds to the Risk of Material misstatement

in such a way that Audit Risk is at an acceptable level.

Audit Plan is the

• Nature (of the evidence needed)
Controls
Substantive
• Timing (by when is the evidence needed)
• Extent (how much evidence is needed)

Of the further audit procedures

Planned audit approach

 AUDIT PLAN – RESPONSES TO ASSESSED TO RISK

Example

- If there is a greater ROMM that Machinery is not fairly valued (e.g.

depreciation not calculated correctly), the auditor will perform more
extensive audit procedures of the accuracy, valuation and
allocation assertion for the Machinery account balance

- This will then result In a lower levels of detection risk for the accuracy,
valuation and allocation assertion – which in turn offsets the original
higher ROMM in this assertion and restores the AR to acceptably low
levels.
 AUDIT PLAN – RESPONSES TO ASSESSED TO RISK

 If an auditor discovers an IR/CR that could impact on an entire set of FS

(the potential for misstatement is present across multiple account
balances and/or classes of transactions)

- This means that IR/CR at FS level will be assessed as high

- Auditor will then have to design an approach that ensures that DR at

FS level is appropriately reduced i.e. needs to result in a reduced risk
that the auditor would fail to detect material misstatements in ALL
classes of transactions, account balances and disclosures

VS
 AUDIT PLAN – RESPONSES TO ASSESSED TO RISK

VS

 If
an auditor discovers an increase IR/CR in just one account
balance/class of transaction/disclosure

- This means that the IR/CR for the particular account balance/class of
transaction/disclosure will increase

- Auditor will then have to design an approach that ensures that DR for
only that account balance/class of transaction/disclosure will need to
be reduced
- This will not effect the DR for other account balance/class of
transactions/disclosures
 RISK BASED AUDIT APPROACH - RECAPPED

This approach enables the auditor to identify the risk of material misstatement
throughout the process of obtaining an understanding of the entity and its
environment

It relates the identified risks to the assertions pertaining to account balances and
classes of transactions (identifying the assertions most at risk of material
misstatement).

The auditor can then respond to those risks by designing an appropriate audit
approach.

Risks at the overall financial statement level will be dealt with by the overall
responses (ISA 330, par 5 and A1 to A33). The risks at the assertion level will
be dealt with by the audit procedures responsive to the assessed risk of material
misstatement at the assertion level (ISA 330, par 6 and A4 to A8).