Assessing Materiality and Risk Simulation
Next we will answer if any component of audit risk is within the control of the auditor. Last we will look at how the three risks that make up audit risk are inter-related. Overall this paper will give us a better understanding of the simulation.. Certain accounts need to be audited 100% because those accounts are the most important to the industry which the company operates and usually contain fewer transactions which are easy to verify. The accounts which are usually audited 100% are; cash accounts, lines of credit and any intangibles.
These accounts are important because they are the ones that can be easily missta According to Generally Accepted Accounting principles, what is material are items that could individually or collectively influence the economic decisions of users, taken on the basis of financial statements. The reason that materiality is allocated only to those accounts that are sampled is because the accounts selected on a test basis were selected to be sampled for evidence supporting the financial statements.
Test basis when stated, indicates that less than 100% of the evidence was examined. Accounts which are selected on a test basis merit the testing based on audit risk, control risk, and inherent risk assessments. Of all the components of audit risk (inherent, control, and detection risk), only detection risk is within the control of the auditor. Inherent and control risks are primarily the responsibility of the client, but the detection risk is solely on the auditor.
Detection risk is the risk that an auditor will come to the conclusion that no material errors are present when in fact there are errors. This is the only component the auditor can control because in this case, only the auditor can ensure that the work and information provided from the audit is accurate. As previously mentioned, there are three risks that make up the audit risk are Inherent Risk, Control Risk, and Detection Risk. These three factors determine the conditional probability that an auditor won’t detect a material misstatement in the financial statements when auditing.
When used as an analytical equation, a percentage is delivered determining an acceptable risk of detection. The audit risk concept of inherent risk, control risk, and detection risk make up the foundation for making decisions about the allowable level of detection risk. Additionally, inherent risk, control risk, and detection risk provides the framework for an audit. Throughout this paper we looked at the four questions that we received for the simulation that we completed.
We looked at why certain accounts have to be audited 100%. Then we looked at the reason that materiality is only allocated to those accounts that are sampled. After that we researched if any of the components of audit risk are ever in the auditor’s control. Last we evaluated how the three risks that make up audit risk are inter-related.