11) Planning Materiality Flashcards
what are the four stages in the audit process?
1) pre-engagement
2) planning
3) risk response
4) evaluating and concluding
what information does the planning stage use?
info obtained during the pre-engagement and can be amended during risk response
what does the planning stage consist of?
- obtaining an understanding of the business
- set planning materiality
- risk assessment
- planning further procedures
what is materiality?
the threshold above which missing/incorrect info in the FS is considered to have an impact on decision-making of users
when can we aggregate misstatements?
in the determination of if they are similar and if, in aggregate, they are material
what are items below the overall materiality threshold considered?
immaterial
what are the five steps of calculating planning materiality?
1) stability of indicators
2) use of indicators from SOFP vs SOCI vs both
3) actual vs prior vs budget year
4) computation
5) conclusion
what do we do when assessing the stability of indicators?
use indicators which remain stable over time and in line with business expectations
which stability indicators can we choose from?
Turnover
Assets
Gross profit
Equity
Net profit before tax
why would we use actual figures?
may be more reflective of current business conditions but they may contain misstatements
why would we use prior year figures?
will be audited and free from misstatements but may not be reflective of current conditions
why would we use budgeted figures?
should be compared to actual figures to see if they are reliable and achievable
what percentages to we use for each indicators?
Turnover = 0.5 - 1%
Assets (total) = 1 - 2%
Gross profit = 1 - 2%
Equity = 2 - 5%
Net profit before tax = 5 - 10%
what do we do with figures which are not from a full year?
- SOCI = gross up [x / (number of months / 12)]
- SOFP = not grossed up
at what level do we set materiality if ROMM is high?
at a conservative level
what are two levels of materiality we can consider?
- overall materiality
- specific materiality
what is overall materiality?
(FS as a whole)
- materiality based on professional judgement as to the highest amount of misstatements which could be included in the FS without affecting users as a whole
what is specific materiality?
the materiality level for specific classes of transactions/balances
what is performance materiality used for?
used by the auditor to reduce risk to an appropriately low level so that the level of unidentified misstatements do not exceed overall/specific materiality
at what level is performance materiality set?
at a lower amount than overall/specific
why do we perform more audit work than required by the overall/specific level?
- to reduce the probability that aggregate of undetected miss / uncorrected errors > overall materiality
what can change planning materiality?
if during the audit, the auditor becomes aware of info that would’ve caused her to use a different initial amount
what is the difference between planning and performance materiality?
performance is set at a lower level than planning
why is performance mat set at a level lower than planning mat?
enables the auditor to respond to specific risk without changing planning materiality
