What kind of substantive procedures are we required to perform for any relevant assertions of newly identified significant accounts?

Amount

Inhaltsverzeichnis Show

• Assessed Risk of Material Misstatement
• Audit Approach
• Control Risk
• Inherent Risk (adsbygoogle = window.adsbygoogle || []).push({});
• Linkage View
• Lower Level of Planning Materiality
• Method for Calculating Planning Materiality
• Other Substantive Procedures Risk
• Performance Materiality/Tolerable Misstatement
• Planning Materiality
• Practical Considerations
• Relevant Assertion Level
• Risk Factor
• Significant Audit Area
• Significant Risk
• Stratification Multiplier
• Trivial Misstatements
• What substantive audit procedures should be performed?
• What are the three main types of substantive procedures?
• What are the main types of substantive procedures?
• What procedure is used to audit assertions?

Use amounts from the financial statements to be audited or the trial balance from which those financial statements will be prepared. If not available, use annualized amounts from the most recent interim financial statements. For revenue, use an annualized amount even if the audit period is shorter than a year.

When current amounts are unavailable, significant audit adjustments are expected, or significant changes in the entity's circumstances indicate that current amounts are not representative of the entity's results of operations or financial position, use historical averages based on the past two or three years.

Assessed Risk of Material Misstatement

The assessed risk of material misstatement (RMM) is the product of inherent risk (IR) and control risk (CR). RMM = IR x CR.

Audit Approach

When selecting an audit approach in your risk assessment, consider the following:

• Limited Procedures

  - Preliminary analytical procedures, other risk assessment procedures, and final analytical procedures are considered sufficient and no audit program will be created for the audit area. This approach is not appropriate for significant audit areas.

• Basic Procedures

  - The audit program for the area will include primarily substantive analytical procedures and certain tests of details required by auditing standards or regulations. This approach ordinarily is not appropriate to respond to a fraud risk or other significant risk.

• Extended Procedures

  - The audit program for the area will include the basic procedures plus procedures for additional assurance related to assertions for which you indicated there is a high risk of material misstatement (or moderate risk of material misstatement if fraud or other significant risks exist).

Benchmark

Auditors generally determine planning materiality by applying a percentage to a benchmark amount from the financial statements. When selecting a benchmark, consider the following:

• Elements of financial statements (for example, assets, liabilities, equity, income, and expenses) and GAAP financial statement measures (for example, financial position, financial performance, and cash flows).

• Nature of the entity and the industry in which it operates.

• Size of the entity, nature of its ownership, and the way it is financed.

• Focus of users’ attention for the particular entity on particular financial statement items (for example, for internet companies, users have tended to focus more on revenues than earnings).

Examples of benchmarks that might be appropriate depending on the nature and circumstances of the entity include total revenue, total assets, gross profit, income from continuing operations before tax, other categories of reported income, and net assets. For many nonpublic companies, total assets or revenue provides a sound benchmark. For public companies, income from continuing operations before taxes may be appropriate (but not when earnings are volatile). Though terminology may differ, comparable items are used as benchmarks for nonprofit organizations, governmental entities, and entities in other types of industries.

Control Risk

Control risk (C/R) is the risk that a misstatement that could occur in a relevant assertion and that could be material, either individually or when aggregated with other misstatements, will be not prevented or detected on a timely basis by the entity’s internal control.

Factor 1

Factor (applied to the benchmark to arrive at planning materiality)

When planning materiality is not determined based on PPC’s table, it is calculated by multiplying the chosen benchmark by a factor. Selection of the appropriate factor (or percentage) is based solely on your judgment about the client and its circumstances. The following are examples of benchmarks and factors that often produce realistic amounts for planning materiality:

• Gross profit: 1% - 2%

• Income from continuing operations before taxes: 5%

• Pretax income: 5% - 10%

• Net income: 3% - 5%

• Equity: 1% - 2%

Though terminology may differ, comparable items are used as benchmarks and factors for nonprofit organizations, governmental entities, and entities in other types of industries.

Factor 2

Factor (applied to planning materiality to arrive at tolerable misstatement when “lower level of planning materiality” is chosen).

Apply a factor necessary to achieve the desired level of Performance Materiality/Tolerable Misstatement for the item. This is based on auditor judgment and is a combined factor to adjust Planning Materiality at the financial statement level to Performance Materiality/Tolerable Misstatement for the item. If desired, Planning Materiality for the item can be documented in the Comment icon at the end of the applicable row.

Inherent Risk (adsbygoogle = window.adsbygoogle || []).push({});

Inherent risk (I/R) is the susceptibility of a relevant assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming there are no related controls.

Linkage View

Allows you to simultaneously view both your identified risks and your audit response by assertion, then tailor your audit program as needed.

Displays and documents the linkage between your identified risks and your selected audit steps, as required by auditing standards. An auditor’s response to an identified risk typically consists of a combination of audit procedures – there typically is not a one-to-one relationship between an identified risk and a single audit step.

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Lower Level of Planning Materiality

In addition to determining materiality at the financial statement level, determine whether there are any financial statement accounts, transaction classes or disclosures for which a lower planning materiality amount is appropriate based on user perceptions of the particular items (for example, legal or regulatory matters, related party transactions, management compensation, key industry disclosures, or subsidiaries or divisions that are separately disclosed). When making the determination, consider:

• Whether accounting standards, laws, or regulations affect users’ expectations regarding the measurement or disclosure of certain items.

• The key disclosures in relation to the industry and the environment in which the entity operates (for example, research and development costs for a pharmaceutical company).

• Whether attention is focused on the financial performance of a particular aspect of the entity's business (for example, a newly acquired business).

Method for Calculating Planning Materiality

This worksheet computes planning materiality based on a table that applies a sliding scale percentage to total assets or total revenue, which the authors believe is suitable for the circumstances of many nonpublic companies. If you want to base planning materiality on an amount other than total assets or total revenue or apply a percentage other than those provided in the table, select Other appropriate base.

Other Substantive Procedures Risk

Other substantive procedures risk is the risk that related substantive procedures besides sampling, such as analytical procedures, will fail to detect a material misstatement. This risk assessment is inversely related to the assurance provided by the other substantive procedures (that is, the more effectively the other procedures contribute to addressing the same assessed risks as the sampling procedure, the lower the risk assessment). A lower risk assessment results in a lower sample size.

Performance Materiality/Tolerable Misstatement

Performance materiality is an amount less than materiality for the financial statements as a whole (i.e., planning materiality) to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Tolerable misstatement is the application of performance materiality to a particular audit sampling procedure and may be the same amount or an amount smaller than performance materiality. For purposes of this audit approach, which is based on MUS sampling, the same amount is used for performance materiality and tolerable misstatement.

Professional standards do not discuss precisely how performance materiality/tolerable misstatement should be calculated. The approach used in this worksheet is to determine performance materiality/tolerable misstatement as a percentage of planning materiality. The percentage used is based on your expectation of uncorrected and undetected misstatements. Using this approach, a common rule of thumb is to calculate performance materiality/tolerable misstatement as a fraction between 50% and 75% of planning materiality, with the percentage being increased from 50% as the likelihood of uncorrected detected misstatements decreases.

Planning Materiality

When establishing the overall strategy for the audit, you should determine a materiality level for the financial statements taken as a whole. The preliminary judgment about materiality, generally referred to as planning materiality, is commonly determined by applying a percentage to a benchmark amount from the financial statements.

Practical Considerations

Designed to provide useful advice to consider when applying specific audit steps. It is not necessary to initial and date the practical considerations. For ease of review, practical considerations may be hidden or made visible by clicking the “Practical Considerations” button on the toolbar.

Relevant Assertion Level

For audit areas that are not significant, however, or for significant areas where you have not identified any specific risks, it may be appropriate to document the risk assessment for the audit area as a whole. If that is done, the risk assessment is assumed to be the same for all assertions and should be the highest level of risk for any assertion in the area. Exercise caution when documenting the assessment at the audit area level. Failure to consider the level of risk related to each assertion could result in an inappropriate audit response to risk.

Risk Factor

The risk factor corresponds to levels for the risk of incorrect acceptance. By default, it is determined from the table below based on your assessments of the risk of material misstatement for the audit area and assertion being tested and other substantive procedures risk. Risk factors range from 3.0 to 0.9, which is analogous to a range of 5% to 40% of the risk of incorrect acceptance.

Use of the table permits you to hold audit risk to an appropriately low level while adjusting the level of the risk of incorrect acceptance in response to the other assessed levels of risk, and permits you to adjust sample size to various combinations of assessed risk levels.

Significant Audit Area

A “significant audit area” is an audit area that contains a significant transaction class, a material account balance, requires significant disclosures, or contains a fraud risk or other significant risk.

Significant Risk

A significant risk is one that requires special audit attention. An identified fraud risk is a significant risk.

Stratification Multiplier

If it is impractical to stratify after identifying individually significant items, the sample size should be increased. The AICPA Sampling Guide notes that sample sizes typically increase by 10% to 50% in such cases, but an adjustment of 100% or more may be needed when there is extreme variability in the characteristic of audit interest. The authors recommend the sample size be increased by 20% if stratification is not practical and there is not a significant variation in the items being sampled. Consequently, a factor of 1.2 is applied by default. You may change the factor to another value if you determine it is necessary to increase the sample size by a different percentage.

Stratified

This sampling approach depends on dividing the items being tested into at least three groups: individually significant items, and an upper and a lower group of remaining items. A useful approach to stratification is to divide the remaining population after individually significant items into two groups based on the average item amount. Then, allocate the sample size two-thirds to the upper stratum (items above the average) and one-third to the lower stratum (items below the average).

If it is impractical to stratify after identifying individually significant items, the sample size is increased by 20%. However, the AICPA Sampling Guide notes that while sample sizes typically increase by 10% to 50% if the sample is not stratified, an adjustment of 100% or more may be needed when there is extreme variability in the characteristic of audit interest. If desired, you may apply a factor other than 20% by clicking the preview icon to view the sample size calculation.

Trivial Misstatements

Some auditors set an amount below which detected misstatements need not be accumulated on the summary of audit differences (often referred to as adjustments passed at the workpaper level). This amount should be determined such that any misstatements either individually or when aggregated with other misstatements, would be clearly immaterial to the financial statements, after the possibility of further undetected misstatements is considered. A space has been provided for you to document, if desired, the amount of misstatements that will be passed at the workpaper level.

What substantive audit procedures should be performed?

What are the three main types of substantive procedures?

What are the main types of substantive procedures?

What procedure is used to audit assertions?