Auditing and Assurance: Concepts and Applications
What the applications paper tests
Auditing and Assurance: Concepts and Applications tests execution: planning, materiality, risk responses, sampling, substantive and analytical procedures, completion, and audit reporting. Questions often present a condition and ask for the opinion, procedure, or effect on the report.
Core rules
- Materiality is set at overall financial statement level and performance materiality below it; it affects scope, not just the final opinion.
- PSA 530 sampling: sample must be representative; misstatement projection depends on the sampling method.
- PSA 700 gives an unmodified opinion when statements are prepared, in all material respects, in accordance with the framework.
- PSA 705: qualified when misstatement or scope limitation is material but not pervasive; adverse for material and pervasive misstatement; disclaimer for material and pervasive inability to obtain evidence.
- Key audit matters are communicated in listed entity audits but do not change the opinion.
- Going concern: material uncertainty is disclosed; if disclosure is inadequate, modify the opinion.
Worked example
Inventory is overstated by ₱8 million. Overall materiality is ₱5 million and performance materiality is ₱3.5 million. The misstatement is material. Because inventory affects only certain balances and is not pervasive to the financial statements as a whole, the auditor issues a qualified opinion, not an adverse opinion. The basis for qualified opinion paragraph explains the matter.
Traps
Do not treat a scope limitation like a disagreement. Do not issue a disclaimer merely because a material misstatement exists. Do not put an emphasis-of-matter paragraph in place of a required modification. Sampling risk is not the same as non-sampling risk.