Kế toán, kiểm toán - Chapter 7: Inherent risk assessment and materiality

CHAPTER 7INHERENT RISK ASSESSMENT AND MATERIALITY1Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettINHERENT RISK (IR)Defined: Susceptibility of account balance or class of transactions to material misstatement, given inherent and environmental characteristics, without regard to internal control structure (AUS 402.09/ISA 400.04).Auditor required to assess IR at financial report level for audit plan, with assessment related to assertions at account balance or class of transactions level when developing audit program.2Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettFACTORS AFFECTING IR AT FINANCIAL REPORT LEVELIntegrity of managementManagement experience, knowledge and changes during the periodUnusual pressure on managementNature of entity’s businessFactors affecting the industry3Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettINHERENT RISK AND COMPUTER INFORMATION SYSTEMS (CIS)As CIS risks can be pervasive to the entity, factorsaffecting overall IR associated with CIS are:Significant changes in CISInsufficient CIS skills and resourcesLack of entity support and focusHigh dependence on CISReliance on outsourced CISReliability and complexity of CIS4Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettINHERENT RISK ASSESSMENT AT ACCOUNT BALANCE AND CLASS OF TRANSACTIONS LEVELConsiderations include:Accounts likely to require adjustmentComplexity of underlying transactionsJudgment involved in determining account balanceSusceptibility of assets to loss or misappropriationOccurrence of unusual and complex transactions, particularly at or near year-endtransactions not subject to ordinary processing5Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettEFFECT OF INHERENT RISK ON AN ACCOUNT BALANCE ASSERTIONFigure 7.1 Effect of inherent risk on an account balance assertion (p. 290)6Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCONSIDERATION OF FRAUD AT PLANNING STAGEAt planning stage, auditor must considerthe risk that misstatements from fraud orerror will not be detected.It is easier to miss material misstatements resulting from fraud because fraud involves acts designed to conceal it.7Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettAUDIT PROCEDURES FOR FRAUD AT PLANNING STAGEAuditor will use their experience, knowledge and training to determine whether fraud could occur.Auditor needs thorough understanding of client’s business in order to identify opportunities for perpetration of fraud.Auditor will need to consider:Business environmentInternal control structure8Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettRISK AT RED FLAG INDICATORS OF FRAUDThese are listed in Table 7.1 (p. 292) and aregrouped under:ManagementUnusual pressures within an entityMarket pressuresUnusual transactionsUnsatisfactory recordsCIS environment9Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCONSIDERING EARNINGS MANAGEMENT INCENTIVESEarnings management occurs when judgment in financial reporting and in structuring transactions is used to alter financial reports to influence perceptions of stakeholders of outcomes dependent on reported accounting numbers.Earnings management involves those responsible for preparing the financial report such as the Chief Financial Officer (CFO) and Chief Executive Officer (CEO).Incentives to manage earnings can be either behavioural or market-based.10Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettBROAD CATEGORIES OF EARNINGS MANAGEMENTInternational violations of accounting standards and other reporting requirements that are individually immaterialInappropriate revenue recognition‘Big bath’ charges under the guise of restructuringImproper accruals and estimation of liabilities in good times11Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCONSIDERING ILLEGAL ACTSAUS 218 provides guidance on auditor’sconsideration of illegal acts (noncompliance withlaws and regulations):Must understand the legal and regulatory framework applicable to the entity and industryAudit normally does not include procedures designed specifically to detect illegal actsAuditor must recognise circumstances requiring special attention (e.g. debenture deed requires a specific current ratio be maintained) and consider these in preparation of audit programs12Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettRELATED PARTIESThe auditor must identify all related parties when planning the audit because:The existence of related parties or related-party transactions can affect the financial information. E.g. the accounting standards require the disclosure of information relating to related parties.The reliability of audit evidence is a function of the source of that evidence. Therefore, evidence from related parties and transactions with those parties need to be more carefully evaluated.The initiation of a related-party transaction might be motivated by other than ordinary business conditions, such as fraud.13Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPRELIMINARY ASSESSMENT OF GOING CONCERN BASIS IDefined: Entity expected to pay debts as andwhen they fall due, and continue to operatewithout any intention necessarily toliquidate or otherwise wind up operations.(AUS 708.03/ISA 570.03)Auditor required by standards to assess going concern at planning stage.Imminent business failure might have an effect on appropriateness of presentation of financial report or might motivate management misrepresentations.14Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPRELIMINARY ASSESSMENT OF GOING CONCERN BASIS IIEarly identification helps focus audit effort on appropriate assertions in financial report, and permits early communication with management. Auditor focuses primarily on anticipated events during the relevant period, approximately 12 months from date of current audit report to expected date of next audit report.15Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettEXAMPLES OF INDICATIONS OF GOING CONCERN PROBLEMSOperating indicators include:Lack of strategic directionConcentration of risk in few productsLoss of major marketFinancial indicators include:High gearing, debt/equity ratioAdverse movements in key ratios, falls in profitability, current, cash flow ratiosInability to pay creditors[See Table 7.2 (p. 298)]16Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettEXAMPLES OF MITIGATING FACTORSAuditor should consider mitigating factors:Asset factors — sale of assets, with delayed replacementDebt factors — unused lines of credit, ability to renew or extend existing loansCost factors — ability to reduce costsEquity factors — additional contributions from owners, subsidiaries or associates[See Table 7.3 (p.299)]17Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettMATERIALITYDefined: information which if misstated,omitted, or not disclosed separately in afinancial report may adversely affect eitheruser decisions or the discharge of accountabilityby management. (AUS 306.03/ISA 320.03)Auditor uses materiality to:Evaluate presentation of financial dataDetermine nature, timing and extent of audit procedures18Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettQUANTITATIVE GUIDELINES — MATERIALITYMaterial   10% of appropriate base amountImmaterial   5% of appropriate base amountJudgment  5-10% of appropriate base amountBase amount for statement of financial position items equity, or the appropriate asset or liability class totalBase amount for statement of financial performance items  net profit or loss and appropriate revenue and expense amount, for year or averaged over a number of years19Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettRULES OF THUMB FOR PLANNING MATERIALITY Range of percentages Common bases applied to base Relative advantagesNet profit 5–10 RelevanceTotal revenue 0.5–1 StabilityTotal assets 0.5–1 Predictability and stabilityEquity 1–2 StabilityTable 7.4 Rules of thumb for planning materiality (p. 303)20Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettFINANCIAL INFORMATION USED AS BASECan be taken from:Financial report to be audited (if available);Annualised interim financial information; orPrevious period’s financial report.21Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettALLOCATION OF MATERIALITY TO ACCOUNT BALANCES AND CLASSES OF TRANSACTIONSAuditor needs to allocate planning material to account balances and classes of transactions for audit testing.(Auditing standards are silent on this issue.)No required or optimal method, but auditor should consider:Dollar value of accountExpectation of error22Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettRELATIONSHIP BETWEEN MATERIALITY AND AUDIT RISKThere is an inverse relationship between audit risk and materiality.Auditor sets a lower materiality threshold for accounts that have a higher audit risk. This means the auditor will need to collect more evidence for these accounts.23Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger Simnett