Question

describe materiality and how an auditor asseses and identifies materiality for an operational audit, compliance audit and financial statement audit?

Answer 1

Solution:-

Describe materiality and how an auditor asseses and identifies materiality for an operational audit, compliance audit and financial statement audit:-

Materiality = quantity and quality

Both the amount (quantity) and nature (quality) of misstatements are relevant to deciding what is material.

The objective of a financial statement audit is to enable the auditor to express an opinion as to whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. This is a separate responsibility and a separate decision from that made by the entity itself when preparing the financial statements.

In auditing, materiality means not just a quantified amount, but the effect that amount will have in various contexts.

During the audit planning process the auditor decides what the level of materiality will be, taking into account the entirety of the financial statements to be audited. Materiality relates to both the content of the financial statements and the level and type of testing to be done. The decision is based on judgements about the size, nature and particular circumstances of misstatements (or omissions) that could influence users of the financial reports. In addition, the decision is influenced by legislative and regulatory requirements and public expectations.

If, during the audit, the auditor acquires information that would have caused it to determine a different materiality level, it will revise the materiality level accordingly.

Operation Audit:-

Materiality is a significant concept inauditing which is applied at the planning stage by theauditors. The three steps through which auditors follow so as to assess and identifymateriality are; 1) choosing an appropriate benchmark, 2) determining the levelof the benchmark chosen and 3) justification of the choice (Joldoş, Stanciu, & Grejdan, 2010). In operational audits,materiality can be identified through theevaluation of specificactivities in an organization.

Compliance Audit:-

Materiality in the case where a compliance audit is put in place is identified through significantly analyzing the key guidelines and laws that are put in place to govern the organization (Hay, Knechel, & Willekens, 2014).

Financial Audit:-

With the implementation of a financial statement audit, the auditor is in a position to elaborate on whether or not the financial statement is preparedin all material respect.