Question

Explain how materiality and audit procedures to gather evidence are important in planning an audit.

Answer 1

However, ISA 320 Materiality in planning and performing an audit does not include a definition
for materiality. Perhaps the most important reason why materiality is not defined in the ISA is because the principle of materiality is first and foremost a financial reporting, rather than an
auditing, concept. Also, the interpretation may differ in different parts of the world.
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. It is important therefore that auditors refer to any discussion of materiality in the financial reporting framework when determining materiality for the audit. Such a discussion, if present, provides auditors with a frame of reference.
The ISA does, however, highlight some key words and phrases in relation to materiality in the context of an audit which include:

• misstatements (including omissions) which could influence decisions of users of the financial statements;
• judgement (ie, there is not a single right answer) based on surrounding circumstances
including the size and nature of the misstatement; and
• that those decisions are based on the users’ common needs as a group.

AS 500—Audit Evidence, contains significant guidance explaining what constitutes audit evidence. It deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion. If not displayed, selected requirements and application guidance found in CAS 500 may be viewed by clicking the “more” feature displayed in the standards information above.

Audit procedures for obtaining audit evidence

The evidence-gathering process involves the following steps:

designing the audit procedures or tests;carrying out the audit procedures or tests and/or gathering evidence;analyzing evidence and drawing conclusions, which may also involve evaluating performance against the audit criteria; andmaking decisions about whether additional information is required and can be obtained (go back to step 1) or whether sufficient appropriate evidence exists.

Audit procedures typically focus on the key risk areas identified through a risk analysis.

It is not unusual for audits to be redesigned during the examination stage as teams encounter unforeseen difficulties in gathering sufficient evidence of appropriate quality. Auditors have to be alert to any signs that the evidence-gathering process may not be achieving the level of assurance required for the audit assignment and take appropriate corrective action. If there are any potential amendments to the audit program, communicate these changes and raise any other issues, on a timely basis, with the senior members of the audit team. In instances where modifications did not take place before the start of field work, modify the audit steps as the work progresses, obtain approval for changes to audit programs, and include appropriate information on the nature, timing, and extent of steps to be performed.
Inspection. Inspection of documents and records provides varying degrees of reliability, depending on the nature and source of the documents. Inspection of physical assets provides highly reliable evidence of existence and some indication of value (if it does not appear damaged or obsolete) but not necessarily of ownership or value.

Observation. Observation of the application of a client’s or entity’s policy or procedure provides assurance of that procedure at a given point in time, but not necessarily of its performance at other times during the year.

External confirmation. Confirmation is a written request addressed to third parties.

Recalculation. Computation or recalculation provides a high level of assurance regarding arithmetical accuracy.

Reperformance. Reperformance techniques may be performed manually or through the use of computer-assisted audit techniques