Auditing and Assurance: Risk, Evidence, Materiality and Reporting
Auditing and Assurance tests the logic of an audit: assess risk, design a response, gather sufficient appropriate evidence, and conclude. Scenario questions reward precise use of ISA terminology and a clear chain from assertion to procedure to conclusion.
Risk and the audit approach
- ISA 315 requires understanding the entity and its environment, including internal control, to identify risks of material misstatement at financial statement and assertion level; significant risks need specific responses.
- Assertions: occurrence, completeness, accuracy, cut-off, classification, existence, rights and obligations, valuation, presentation.
- Audit risk = inherent risk × control risk × detection risk. Detection risk is the auditor's lever; it falls as substantive work increases.
Materiality and evidence
- ISA 320: overall materiality from a benchmark (commonly 5% of profit before tax), performance materiality set below it (often 60–75%), and a clearly trivial threshold for accumulating misstatements.
- ISA 500: evidence must be sufficient (quantity) and appropriate (relevance and reliability); externally generated evidence is generally stronger, and external confirmations (ISA 505) are strong for existence and rights.
Worked example
Profit before tax is 8,000,000. Overall materiality at 5% = 400,000. Performance materiality at 75% = 300,000. Clearly trivial at 5% of overall materiality = 20,000. A misstatement of 250,000 is accumulated and evaluated; 300,000 is the threshold used for designing procedures on individual balances; 15,000 is not accumulated.
Reporting and traps
- ISA 700 unmodified opinion; ISA 701 key audit matters only for listed entities; ISA 705 modifications for material misstatement or inability to obtain evidence; ISA 570 going concern material uncertainty goes in a separate section.
- Traps: treating materiality as one number, confusing sampling risk with non-sampling risk, and modifying an opinion merely because a risk is significant.