11) Planning Materiality

Question 1

what are the four stages in the audit process?

Answer 1

1) pre-engagement
2) planning
3) risk response
4) evaluating and concluding

Question 2

what information does the planning stage use?

Answer 2

info obtained during the pre-engagement and can be amended during risk response

Question 3

what does the planning stage consist of?

Answer 3

• obtaining an understanding of the business
• set planning materiality
• risk assessment
• planning further procedures

Question 4

what is materiality?

Answer 4

the threshold above which missing/incorrect info in the FS is considered to have an impact on decision-making of users

Question 5

when can we aggregate misstatements?

Answer 5

in the determination of if they are similar and if, in aggregate, they are material

Question 6

what are items below the overall materiality threshold considered?

Answer 6

immaterial

Question 7

what are the five steps of calculating planning materiality?

Answer 7

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

Question 8

what do we do when assessing the stability of indicators?

Answer 8

use indicators which remain stable over time and in line with business expectations

Question 9

which stability indicators can we choose from?

Answer 9

Turnover
Assets
Gross profit
Equity
Net profit before tax

Question 10

why would we use actual figures?

Answer 10

may be more reflective of current business conditions but they may contain misstatements

Question 11

why would we use prior year figures?

Answer 11

will be audited and free from misstatements but may not be reflective of current conditions

Question 12

why would we use budgeted figures?

Answer 12

should be compared to actual figures to see if they are reliable and achievable

Question 13

what percentages to we use for each indicators?

Answer 13

Turnover = 0.5 - 1%
Assets (total) = 1 - 2%
Gross profit = 1 - 2%
Equity = 2 - 5%
Net profit before tax = 5 - 10%

Question 14

what do we do with figures which are not from a full year?

Answer 14

• SOCI = gross up [x / (number of months / 12)]
• SOFP = not grossed up

Question 15

at what level do we set materiality if ROMM is high?

Answer 15

at a conservative level

Question 16

what are two levels of materiality we can consider?

Answer 16

• overall materiality
• specific materiality

Question 17

what is overall materiality?

Answer 17

(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

Question 18

what is specific materiality?

Answer 18

the materiality level for specific classes of transactions/balances

Question 19

what is performance materiality used for?

Answer 19

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

Question 20

at what level is performance materiality set?

Answer 20

at a lower amount than overall/specific

Question 21

why do we perform more audit work than required by the overall/specific level?

Answer 21

• to reduce the probability that aggregate of undetected miss / uncorrected errors > overall materiality

Question 22

what can change planning materiality?

Answer 22

if during the audit, the auditor becomes aware of info that would’ve caused her to use a different initial amount

Question 23

what is the difference between planning and performance materiality?

Answer 23

performance is set at a lower level than planning

Question 24

why is performance mat set at a level lower than planning mat?

Answer 24

enables the auditor to respond to specific risk without changing planning materiality

Question 25

what is performance mat based on?

Answer 25

audit findings

Question 26

what is final materiality?

Answer 26

calculated during the evaluation and conclusion stage based on the actual results

Question 27

why do we set planning materiality at a conservative level?

Answer 27

to reduce the risk of undiscovered misstatements and provides the auditor with margin of safety for evaluating misstatements

Question 28

what is the relationship between ROMM and materiality?

Answer 28

if ROMM = high, materiality = low