Auditing standards, audit methodology and audit risk
What this domain tests
How you design a statutory audit that complies with the ISAs adopted by the Chamber of Auditors (KA ČR) and with Act No. 93/2009 Coll., and how you defend your risk judgements to an inspector.
The risk model
Audit risk = risk of material misstatement (inherent risk × control risk) × detection risk. IR and CR belong to the entity; DR belongs to you, and it moves inversely to the extent and quality of your procedures. ISA 315 (Revised 2019) requires understanding the entity, its environment, the applicable financial reporting framework and its system of internal control - including IT risks and general IT controls. ISA 330 turns that into responses: tests of controls where you intend to rely on them, and substantive procedures for every material class of transactions.
Materiality and scoping
ISA 320 requires overall materiality from a benchmark (5% of profit before tax; 0.5–1% of revenue or total assets), performance materiality (typically 50–75% of overall) and a clearly trivial threshold. The benchmark choice is a documented judgement, not a formula, and it must be revisited at completion.
Evidence and completion
ISA 500 (sufficiency and appropriateness), 505 external confirmations, 520 analytical procedures, 530 sampling, 540 estimates, 550 related parties, 570 going concern (at least 12 months from the date of the financial statements), 600 group audits, 240 fraud, 620 auditor's expert, 230 documentation (final file assembled within 60 days of the report date), 700/701/705/706 reporting.
Worked example
A trader has revenue CZK 400m and profit before tax CZK 32m. 5% of PBT = CZK 1.6m; 1% of revenue = CZK 4m. The lower, defensible benchmark is PBT, so overall materiality is CZK 1.6m and performance materiality 70% = CZK 1.12m. Rebates are complex and unreviewed by the client, so RMM is assessed high (say 80%). To hold audit risk near 5%, detection risk must be about 6% - meaning a large sample, external confirmation of rebate balances and full-population analytics rather than a small test of detail.
Traps
Treating performance materiality as the threshold for uncorrected misstatements; never revising materiality at the completion stage; claiming controls are effective without testing them; issuing key audit matters under ISA 701 as if mandatory for every entity; measuring the going-concern period from the report date.