Audit Planning, Risk Assessment and Materiality
Domain 1 tests how an auditor builds a risk-based plan and sets materiality that drives the nature, timing and extent of procedures.
Planning and risk
- SA 300 requires an overall audit strategy before the detailed audit plan; both are updated as work proceeds.
- SA 315 requires understanding the entity, its environment and internal control, then identifying risks of material misstatement at assertion level.
- Significant risks need special attention; SA 240 presumes fraud risk in revenue recognition unless rebutted and documented.
Materiality
SA 320 distinguishes overall materiality, performance materiality and specific materiality. Performance materiality is set below overall materiality to leave room for undetected misstatement; clearly trivial is a separate, much lower threshold. Materiality is revised if circumstances change.
Worked example
Profit before tax is ₹40 crore. Using a 5% benchmark, overall materiality is ₹2 crore; performance materiality at 75% is ₹1.5 crore; a clearly trivial threshold at 5% of overall materiality is ₹10 lakh. A known ₹12 lakh misstatement is not clearly trivial, so it is accumulated and evaluated. If the benchmark were total revenue because the entity is loss-making, the rationale must be documented.
Traps
Mechanically applying 5% of profit; setting performance materiality above overall materiality; ignoring qualitative materiality such as related-party or regulatory items; and failing to document why the revenue-recognition fraud presumption was rebutted.