Auditing and Assurance: Risk, Evidence and Reporting
Auditing and Assurance tests the ISA-based audit process from acceptance to opinion. Marks are earned for linking a identified risk to a specific assertion and a specific procedure, and for justifying the type of opinion rather than stating it.
Risk, materiality and evidence
- ISA 315: obtain an understanding of the entity, its environment and its internal control, then identify risks of material misstatement at financial statement and assertion level; significant risks require substantive work and are not left to controls alone.
- ISA 320: materiality is a matter of professional judgement. Typical benchmarks are 5% of profit before tax, 1% of total assets or 0.5%–1% of revenue, with performance materiality set at 50%–75% of overall materiality.
- ISA 500 assertions: for transactions - occurrence, completeness, accuracy, cut-off, classification; for balances - existence, rights and obligations, valuation, completeness.
- Other standards: ISA 530 sampling, ISA 560 subsequent events, ISA 570 going concern, ISA 700/701/705/706 reporting, ISQM 1 firm-level quality management.
Worked example
Profit before tax is EUR 1.2m. Using 5%, overall materiality is EUR 60,000, performance materiality EUR 45,000 (75%) and clearly trivial EUR 3,000 (5%). The audit finds inventory overstated by EUR 52,000, unadjusted, plus an unrecorded accrual of EUR 10,000. Total uncorrected misstatement is EUR 62,000, above overall materiality. The misstatement is confined to inventory and cost of sales and does not affect the financial statements as a whole in a fundamental way, so the correct opinion is qualified ("except for"). If the matter were pervasive - pervasive meaning not confined to specific elements, representing a substantial proportion of the statements, or relating to disclosures fundamental to users - an adverse opinion would follow.
Traps that cost marks
Using management representations as a substitute for other evidence; treating the materiality percentage as a fixed rule; writing key audit matters for a non-listed client where none are required; assuming a subsequent event occurring after the reporting date always adjusts the figures rather than being disclosed; and concluding that low assessed risk means no substantive work.