Question

plan an audit with reference to scope, materiality and risk

Answer 1

Audit planning is defined as the process in which the strategy is designed to conduct the expected result which also defines the scope of audit inside the company. The size, nature and the time for the audit plan may vary. It depends on the size of the business. If the business is spread to the large scale, the strategy making, and its implementation will take more time and the overall scope of Audit plan may also increase. It’s basically the step by step methodology where the audit in control reviews the financial process and the internal environment along with the engagement preparation.

Audit planning is important since the aim of doing it is to make the error free of financial statement as well as ensuring the time for reviewing or cross-checking financial events; lesser time in correcting accounts with different planning methods used to determine risk, internal controls assessment, etc….

A .Scope : An audit should have a clear scope that focuses its extent, timing and nature as well as selected issues on the basis of their relevance to the audit ability. During the early planning stages, the appointment activity to be audited is often defined in broad terms. Very seldom is it practical or cost-effective to audit everything. Scoping the audit involves narrowing the audit to relatively few matters of significance pertaining to the audit objective, that can be audited with the resources available and that are critical to the achievement of the intended results of the activity being audited. Review of audit planning scope needed to include examination of all activities related. The responsibilities of auditor are to determine the performance risks and financial statements audit risk. The three risks are inherent risk, control risk, and detection risk.

B.Audit risk:

Audit risk is the risk that auditors may give an inappropriate opinion on the financial statements. There are three components of audit risk including inherent risk, control risk and detection risk.

Inherent risk: The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. There two main types of factors which are factors affecting client and factors affecting individual account balances or transactions. Factors affecting client.

Control Risks:

Control risk or internal control risk is the risk that current internal control could not detect or fail to protect significant error or misstatement in the financial statements. Basically, managements are required to set up and assess the effectiveness and efficiency of internal control over financial reporting to make sure that financial statements are free from material misstatements.

Detection Risk:

Well detection risk is the risk that auditor fail to detect the material misstatement in the financial statements and then issued incorrect opinion to the audited financial statements.

Materiality in the Context of an Audit Plan

Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that:

· Misstatements, including omissions, are considered to be material if they, individually or In the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements;

· Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and

· Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group.

Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures