Transcript Materiality

CHAPTER 5
Audit Planning with Analytical
Procedures, Risk, and Materiality
• Pre-engagement
Understand the
Obtain the
arrangements
client`s business
financial statements
Audit planning tools
Preliminary
analytical
procedures
Preliminary
materiality
decisions
Preliminary
risk
assessment
Audit
programs
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1.Preliminary analytical
procedures
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•
•
•
• 5 general forms p130
1.current-year account balances to balances of one or
more comparable periods.
历史的相同帐户余额
2. current-year account balances to budgets and
forecasts.
未来的相同帐户余额
3.the relationships of current-year account balances to
other current-year balances
当年的不同帐户余额
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5 general forms
• 4. current-year account balances and
financial relationships(e.g, ratios) with
similar information for the industry in
which the company operates.
同行业
• 5.the relationships of current-year account
balances with relevant nonfinancial
information(e.g, physical production
statistics).
非财务
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The definition of Preliminary
analytical procedures
• A wide range of
early information-gathering
activity.
• “attention directing”
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The range of Preliminary
analytical procedures
• (a)review of adjustments proposed in prior
years` audits;
• (b)conversations with client personnel;
• ©reading and study minutes of the meetings
of directors and committees of the board of
directors;
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The range of Preliminary
analytical procedures
• (d)review of the corporate charter and
bylaw or partnership agreement;
• (e)review of contracts, agreements, and
legal proceedings;
• (f) many other activities that do not fit the
strict definition of the five general types of
analytical procedures.
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The purpose of Preliminary
analytical procedures
“attention directing”:
To alert the audit team to problems
(errors, irregularities)
in the account balances and disclosures.
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2. Analysis of unaudited financial
statements
• Horizontal analysis:
2 or more years
• Vertical analysis(proportion):
sales/income statement accounts
total assets/balance sheet accounts
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(1)attention directing
• attention directing
• pointing out accounts that may contain
errors and irregularities, so that subsequent
audit work can be designed to reduce the
risk of missing something important.
• Don`t provide direct evidence.
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(2)an organized approach
• Start:
• comparative financial statements
• calculate common-size (共同比）statement
and year-to-year change in balance sheet
and income statement accounts.
• E5-1, P157.
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(3)describe the financial activities
•
•
•
•
•
•
• E5-1, P157.
NET INCOME
105.56%
sales
10%
cost of good sold
6.67%
General expense
9.06%
interest expense
-33.33%
•
cash…….?
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(4) ask relevant questions
• “what could be wrong?”
• “what errors and irregularities could
account for these financial results?”
• question 1: are the accounts receivable
collectible?(alternative:is the allowance
for doubtful accounts large enough?)
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(4) ask relevant questions
• Question2: could inventory be overstatement?
• (alternative: could the cost of the goods sold
be understated?)
• Other questions can be asked and other
relationships derived when industry statistics
are available.
• Comparing with the budgets and forecasts.
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(5)funds flow analysis
• Use the information in E5-1
to prepare a cash flow statement.
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(6)analytical procedures
requirements
• (a) at the beginning of an audit
• (b) at the end of an audit when the
partners in charge review the overall
quality of the work and look for
apparent problems.
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3.preliminary materiality
decisions
美国《财务会计概念说明书》第2号
• 重要性是指会计信息漏报或错报
的严重程度。这个程度在特定环
境下足以改变或者影响任何一位
理性决策者依赖这些信息所作的
判断。
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(1)Concept: Planning materiality
• Planning materiality:largest amount of
uncorrected dollar misstatement that
could exist in published financial
statements, yet they would still fairly
present the company`s FP&results of
operations in conformity with GAAP.
• information is material and should be
disclosed if it is likely to influence the
economic decisions of financial statement
users.
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Materiality
Definition
judgment criteria
5-10% of income before taxes
1/2%-5% of equity or gross profit
1/2%-1% of revenue or assets
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Some amount of inaccuracy is
permitted in financial statements
• (a)unimportant inaccuracies do not
affect user`s decisions and are not
material;
• (b)the cost of finding and correcting
small errors is too great;
• (c)the time taken to find them would
delay issuance of financial statements.
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(2)materiality judgment criteria
(a)guideline
•
•
•
•
1. 5-10%,
2.1/2%-1%,
3. 1/2%-5%,
4. 1/2%-1%,
• 5. 1/2%-5%,
income before taxes
assets
equity
revenue
gross profit
？
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以总资产或总收入的变动百分比为基础的重要性水平($)
如总资产或总收入中较大者
超过
但不超过
0
30千
30千
100千
100千
300千
300千
1百万
1百万
3百万
3百万
10百万
10百万
30百万
30百万
100百万
100百万
300百万
300百万
10亿
10亿
30亿
30亿
100亿
100亿
300亿
300亿
1000亿
1000亿
3000亿
3000亿
…
超过以下
金额的部分
0+0.059
0
1 780+0.031
30千
3970+0.0214
100千
8300+0.0145
300千
18400+0.0100
1百万
38300+0.0067
3百万
85500+0.0046
10百万
178000+0.00313
30百万
397000+0.00214
100百万
856000+0.00145
300百万
1840000+0.00100
10亿
3830000+0.00067
30亿
8550000+0.00046
100亿
17800000+0.00031
300亿
39700000+0.00021
1000亿
82600000+0.00015
3000亿
重要性
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计划阶段的重要性
（1）特征
income before taxes、 gross profit 关联性
assets
预计性与稳定性
revenue
相对稳定性
（2）判断
• A、income before taxes，重要，0，平均数
• B、assets 稳定性，不适合劳动密集型企业
• C、revenue 相对稳定性
(3)不同，最小
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(2)materiality judgment criteria
•
•
•
•
•
•
(b)factors of judgments:
absolute size
绝对
relative size
nature of the item or issue
circumstances
cumulative effects 累计
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（3）materiality allocation
versus nonallocation
• Tolerable misstatement:
the amount assigned to an account,
by which a particular account may be
misstated, yet still not cause the financial
statements taken as a whole to be
materially misleading.
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（3）materiality allocation
versus nonallocation
• Tolerable misstatement
for each account
In based on
the overall financial statement
materiality.
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金额：approaches
• (a)add up to twice the overall materiality
•
• a+b+c=2 M
overstatements and understatements
-M
+M
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approaches
• (b)square root of the sum of the squared
tolerable misstatement is equal to the
overall materiality
2
2
2
a+b+c= M
Random errors in calculation of statistical
variance
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approaches
• ©assign tolerable misstatement amounts
that exactly add up to the overall materiality
•
a+b+c= M
•
-a - b - c = -M
SAME DIRECTION
• (d)not allocate, use the same overall
materiality level for the entire audit.
•
CICA
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(4)materiality and planning
A. As a guide to planning the audit
program—directing attention and audit
work to the important,uncertain,or
material error-prone items and accounts;
B. As a guide to evaluation of the evidence;
C. As a guide for making decisions about the
audit report.
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4.preliminary assessment of
audit risks
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•
•
•
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(1)inherent risk
(2)control risk
(3)detection risk
(4)audit risk
(5)risk model
• AR=IR × CR × DR
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(1)inherent risk
• The probability that material misstatements
have occurred, regardless of the existence of
internal control, in transactions entering the
accounting system used to develop financial
statements, or that material misstatements
have occurred in an account balance.
• Auditor do not create or control the
inherent risk.they can only evaluate it.
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(2)control risk
• The risk that the client`s internal control Will
not prevent or detect a material misstatement.
• Auditor do not create or control the control
risk.they can only evaluate a company`s control
system.
• control risk should not be assessed so low that
auditor do not perform any other audit work.
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(3)detection risk
• The risk that any material misstatement that
has not been corrected by the client`s
internal control will not be detected by the
auditor.
• Substantive procedure-----detect material
misstatements.
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Categories of substantive
procedure
• (a)audit of the details of transactions and
balances
• 交易和余额的详细审计
• (b)analytical procedures applied to produce
circumstantial evidence about dollar
amounts in the accounts.
• substantive procedure RISK=AB
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(4)audit risk
• Definition
• The probability that an auditor will fail to
express a reservation that financial
statement are materially misstated.
• 未存在materially misstatement，而未发表
无保留意见
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Materiality
Definition
judgment criteria
5-10% of income before taxes
1/2%-5% of equity or gross profit
1/2%-1% of revenue
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Materiality
Un
qualified
5%
Audit Risk
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Materiality
Unqu
alified
5%
Audit Risk
5%
1个项目：95%，5%
100个项目，95，5
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(4)audit risk
• Standard
• NO HARD STANDARD
• NO MORE THAN 5 PERCENT
• bad audits:
5%audit risk × 6%material misstatement
=0.3%
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固有风险
信息系
统风险
抽样
风险
过信险
非抽样
风险
信赖不足险
控制风险
审计风险
分析性
检查风险
审
计
职
业
风
险
抽样
风险
误受险
非抽样
风险
误拒险
察觉
风险
实质性
经营风险
测试风险
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(5)risk model
• Audit risk(AR)=
Inherent risk(IR) × Control risk(CR) × Detection(DR)
• AR=IR × CR × DR
• 0.05=0.90 × 0.70 × DR
• DR=0.05/(0.90 × 0.70)=0.08
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(5)risk model
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•
•
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(a) AR=IR(0) × CR × DR=0
(b) AR=IR × CR(0) × DR=0
(c) AR=IR(0.80) × CR(0.80) × DR(0.50)
=0.32
(d) AR=IR(1.00) × CR(1.00) × DR(0.05)
=0.05
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(6)planning memorandum
• P170
• 1-9
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5.audit program
• (1)internal control program
(p172)
• (2)balance-audit program
(p173)
• combine all the considerations of audit
planning(chapter 4-5)
• audit program
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Auditing Assignments(CH5)
• 1.理解下列各题，可以不交。
• (1)chapter5: 5.1, 5.2, 5.8, 5.11, 5.12, 5.15,
5.17
• 2.书面提交
• (1)chapter 5, 5.20,
(2)chapter 5, 5.21--5.37
• (3)chapter 5, 5.40, 5.41
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