Audit Risk And Materiality: It’s Impact On Auditors Responsibilities

Project and Seminar Material for Accountancy / Accounting

Audit Risk And Materiality: It’s Impact On Auditors Responsibilities


Abstract


The aim of this study is to find out audit risk and materiality: it’s impact on auditor’s responsibilities. This work was divided into five parts. The first chapter is the introductory part of the research work, which includes background of the study, statement of problems, research question etc extensive literatures was reviewed this means other recognized authors view or ideas on the subject matter. Data for this research work was sourced through primary and secondary sources of data collection. The presentation and analysis of data were dealt with in this research work. Simple random and stratified sampling is to be used to draw the sample size of the study. Hypotheses was formulated and tested. Questionnaires and oral interview have to be used as the main instrument of data collection. Based on the findings, conclusion was drawn and recommendations was also made in the last part of the work.


Table of Content


Preliminary Page(s)

  • Title page
  • Certification page
  • Approval page
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of contents

Chapter One

Introduction

  • 1.1 Background of the study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the study
  • 1.4 Research questions
  • 1.5 Hypothesis
  • 1.6 Significant of the study
  • 1.7 Scope and limitation of the study
  • 1.8 Definition of terms
  • References

Chapter Two

Review of Related Literature

  • 2.1 Concept of Materiality
  • 2.1.1 Audit objective and materiality
  • 2.1.2 Matters influencing materiality
  • 2.2 Concept of audit risks
  • 2.3 Audit risk and materiality
  • 2.3.1 During audit function
  • 2.3.2 Materiality and reporting
  • 2.3.3 Extending the audit procedures
  • 2.3.4 Determining materiality
  • 2.4 Materiality in the context of an audit
  • 2.5 Nature and causes of misstatements
  • 2.6 Considerations at the financial statement level
  • 2.7 Considerations at the individual account balance, class of transactions or disclosure level
  • 2.8 Determining materiality for financial statements taken as a whole when planning the audit
  • 2.9 Materiality for particular items of lesser amount than the materiality level determined for the financial  statements taken as a whole
  • 2.10 Tolerable misstatement
  • References

Chapter Three

Research Design and Methodology.

  • 3.1 Research design
  • 3.2 Description of Respondents
  • 3.3 Sources of data
  • 3.4 Population and determination of sample size
  • 3.5 Method of investigation
  • References

Chapter Four

Presentation, Analysis and Interpretation of Data.

  • 4.1 Presentation and analyses of data
  • 4.2 Testing of hypothesis

Chapter Five

Summary of Findings, Conclusions and Recommendations.

  • 5.1 Summary of findings
  • 5.2 Conclusions
  • 5.3 Recommendations
  • Bibliography
  • Appendix I
  • Appendix II

Chapter One


Introduction

1.1 Background Of The Study

Auditing may be simply defined as the independent examination of the financial statement of an organization with a view to expressing an opinion as to whether these statements give a true and fair view and comply with the relevant statues. This opinion must be expressed in form report. The person who caries such examination is called the Auditor.

Audit Risk according to Oxford Accounting Dictionary defines Audit as a risk that an Auditor fails to qualify the audit report when the financial statements are materially misleading, i.e. do not give a true and fair view.

According to AICPA, section 312 and 35D, professional standards recognize that there is some uncertified when an auditor provides an opinion on whether an entity’s financial statements are fairly presented, this uncertainty is known as Audit risk. Audit risk is a function of three risks, they inherent risk, control risk and detection risk. These should be considered by auditors when planning and evaluating the results of an audit. No authoritative guidance is provided on factors that should be considered when establishing materiality for planning or evaluating purposes. During the planning phase of an auditor establish materiality to determine the nature timing and extent of auditors establishes a quantitative amount of materiality during the planning phase. This quantitative amount is known as “planning materiality”.

Planning materiality is allocated to classes of transactions or accounts because auditor normally group related transact classes and account together to design and execute and audit strategy for each of these groupings (auditing cycle approach)

The auditors responsibility when conducting an audit is to provide reasonable assurance that the financial statements are fairly presented in all material respects. All section 312 of the AICPA professional standards notes that financial statements are materiality misstated when they contain misstatement whose effect, individually or in the aggregate results in financial statements that are not fairly presented faithfully.

Materiality assessments are a matter of professional judgment requiring auditors to consider the needs of individual financial statement users.


1.2 Statement Of The Problem

The basic problem is that there is some uncertainty when an auditor provides an opinion on whether an entity’s financial statements are fairly presented and the auditor’s responsibilities when conducting an audit in order to provide reasonable assurance that the financial statement are fairly presented in all material respects.

Other problems observed are:

  1. How planning and evaluating the results of an audit can be considered by the auditors.
  2. Factors which an auditor can consider to allocate planning materiality
  3. Arising of materiality dependent on the size and nature of an item and the particular circumstance
  4. Ways by which an auditor can follow audit risk assessment process to reduce the risk of an unqualified opinion.

1.3 Objective Of The Study

The main purpose of this research work is:

  1. To ascertain how materiality should be considered by an auditor when planning and evaluating the results of an audit
  2. How an auditor can examine audit risk assessment process to limit it to an appropriate level, the risk that an unqualified opinion will be issues when an material misstatement exist.
  3. To verify the factors which an auditor may consider to allocate planning materiality
  4. To identify how materiality arises depend on the size and nature of an item(s) and the particular circumstance.

1.4 Research Questions

  1. How does an auditor compare materiality when planning and evaluating the result of a audit?
  2. Does an audit risk assessment process exist when an unqualified opinion is issued in a material misstatement?
  3. What are the consequences which an auditor may consider to allocate planning materiality?
  4. How does materiality arises on the size and nature of an item(s) and the particular circumstance.

1.5 Research Hypothesis

In order to find answer to the questions raised in the research work, there is need to formulate hypothesis on these problems

The hypothesis are:

  • Ho: Audit risk and materiality have significant role on the auditors responsibilities
  • H1: Audit risk and materiality has significant role on the auditor responsibilities.

1.6 Significance Of The Study

  1. The importance of the study is that it will highlight the consequences of audit risk and materiality and how it affects and auditors in their functions or roles
  2. In this particular circumstance, auditor needs to consider three risks to ensure that the overall risk of inappropriately issuing an unqualified opinion is limited to an appropriate level. (Audit risk = Inherent Risk x control of risk x detection risk).
  3. This study would serve as an information back for future research in the area of auditing.
  4. The outcome of this study, would enhance the ability of the student offering courses in Auditing to understand the subject property.

1.7 The Scope And Limitation Of The Study

This study is aimed at identifying the impact of and it risk and materiality on auditor’s responsibilities. The research work was however, hamperedly the following unavoidable constraints

1. Time:

The battle of carrying out this research along with the semester academic work was enormous and tedious. The researcher could only manage any available time at her disposal that would not disturb her own academic works.

2. Resource constraint:

The financial need of the research work is also enormous. The fact the researcher is prone to only a paltry fixed a salary at the end of every month were daily bread, is met has actually limited the research work because of the cost of data collection.

3. Respondents:

The information used was based on that, provided by the respondents that are seen as actual participants in the keeping and disbursement of public funds.

4. Location Constraint:

The research was based on information provided by civil servants serving in Enugu State, even though the research work was a survey of the center Nigeria situation however, there are some constraints that militate against the success of the study

Below are the limitations

  1. Some setback occurs because of limited time constraints and the researcher were financial handicap to carryout the work.
  2. The researcher is also limited by the unwillingness of certain workers to give out necessary information required from them.

1.8 Definition Of Terms

Auditing:

This is the independent examination of books of account and expression of opinion, on financial statement of an enter prices by an appointed auditor in pursuance of that appointment and compliance with relevant statutory obligation.

Audit Risk:

This is the risk that an auditor fails to qualify the audit report when the financial statements are materiality misleading.

Materiality:

The extent to which an item of accounting information is material. Information is considered material if it’s omission from or misstatement in a financial statement could influence the decision making of its users.

Inherent Risk:

This is the likelihood of misstatement occurring in the absence of controls

Control Risk:

This is the risk that misstatement may not be prevented or detected on a timely basis by the internal control system.

Detected Risk:

This is the risk that auditor’s substantive tests will not defect a misstatement that exists on an account balance or class of transactions.


Chapter Five


Summary Of Findings, Conclusions And Recommendations

5.1 Summary Of Findings

The consideration of audit risk and materiality when planning and performing an audit of financial statements in accordance with generally accepted auditing standards. Audit risk and materiality affect the application of generally accepted auditing standards, especially the standards of field work and reporting, and are reflected in the auditor’s standard report. Audit risk and materiality, among other matters, need to be considered together in determining the nature, timing, and extent of auditing procedures and in evaluating the results of those procedures. The existence of audit risk is recognized in the description of the responsibilities and functions of the independent auditor that states, “Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.” Audit risk is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. As amended, effective for audits of financial statements for periods ending on or after December 15, 1997, by Statement on Auditing Standards No. 82.

The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for fair presentation of financial statements in conformity with generally accepted accounting principles, while other matters are not important. The representation in the auditor’s standard report regarding fair presentation, in all material respects, in conformity with generally accepted accounting principles indicates the auditor’s belief that the financial statements taken as a whole are not materially misstated.

The researcher found out that that Audit risk and materiality has no significant role on the auditor’s responsibilities and also that that Audit risk and materiality has no impact on Auditors responsibility.


5.2 Conclusions

The auditor may require the client or management of the entity to correct the errors or misstatements, if any, which may be material or immaterial, identified. If the client or management has not corrected, any or all of such errors or misstatements, then the auditor should aggregate such errors or misstatements to assess the level of material effect on the financial information. Where the material misstatements are not corrected in the financial information, the auditor should make qualified report. Qualitative considerations also influence the auditor in reaching a conclusion as to whether the misstatements are material.

When the auditors tests an account balance or class of transactions by an analytical procedure, ordinarily it would not possible to specifically identify misstatements but an indication of whether misstatements might exist in the balance or class, and possibly its approximate magnitude, would be obtained. If the analytical procedure indicates that misstatements might exist, but not its approximate amount, the auditor ordinarily should employ other procedures to estimate the aggregate misstatement in the balance or class. When audit sampling is used by the auditor to test an account balance or class of transactions, the amount of known misstatements identified in sample to the items in the balance or class from which such sample was selected should be projected. Such projected misstatement, along with the results of other substantive tests, contributes to the auditor’s assessment of aggregate misstatement in the balance or class.

The consideration of the materiality of an item is the matter of professional judgement and experience of the auditor. The financial statements must contain all the material information to show true and fair picture. AAS-2, “Objective and Scope of the Audit of Financial Statements”, states that the auditor’s opinion helps determination of the true and fair view of the financial position and operating results of an enterprise. The user, however, should not assume that the auditor’s opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.


5.3 Recommendations

Based on the summary of findings and conclusions above, the following recommendations were made by the researcher:

When the auditor tests relevant assertions related to an account balance or a class of transactions by a substantive analytical procedure the auditor might not specifically identify misstatements but would obtain only an indication of whether misstatement might exist in the balance or class and possibly its approximate magnitude. If the substantive analytical procedure indicates that a misstatement might exist, but not its approximate amount, the auditor should request management to investigate and, if necessary, should expand his or her audit procedures to enable him or her to determine whether a misstatement exists in the account balance or class of transactions.
When an auditor uses audit sampling to test a relevant assertion for an account balance or a class of transactions, he or she should project the amount of known misstatements identified in the sample to the items in the balance or class from which the sample was selected. That projected misstatement, along with the results of other substantive procedures, contributes to the auditor’s assessment of likely misstatement in the balance or class.

The “closest reasonable estimate” may be a range of acceptable amounts or a precisely determined point estimate, if that is a better estimate than any other amount. In some cases, the auditor may use a method that produces a range of acceptable amounts to determine the reasonableness of amounts recorded.

The risk of material misstatement of the financial statements is generally greater when account balances and classes of transactions are subject to estimation rather than precise measurement because of the inherent subjectivity in estimating future events. Estimates, such as those for inventory obsolescence, uncollectible receivables, and warranty obligations, are subject not only to the unpredictability of future events, but also to misstatements that may arise from using inadequate or inappropriate data or misapplying appropriate data. Because no one accounting estimate can be considered accurate with certainty, the auditor may determine that a difference between an estimated amount best supported by the audit evidence and the estimated amount included in the financial statements may not be significant, and such difference would not be considered to be a likely misstatement. However, if the auditor believes the estimated amount included in the financial statements is unreasonable, he or she should treat the difference between that estimate and the closest reasonable estimate as a likely misstatement.

The auditor should also consider whether the difference between estimates best supported by the audit evidence and the estimates included in the financial statements, which are individually reasonable, indicate a possible bias on the part of the entity’s management.


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