Risk pt 2 - Risk and materiality

How does risk relate to materiality?

The goal of risk assessment is '...to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level.' (ISA 200,5)

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Therefore we must decide what level of misstatement is material. As in all our audit work or focus must be on what is material, so we don't get lost in irrelevant detail. Materiality and audit risk are considered throughout the audit, in particular, when:
(a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures; and
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.

Therefore, risk assessment, as all parts of the audit, is driven by materiality. Some things are material based not on the dollar amount they represent, but their potential impact on the needs of the users of the financial statements (see ISA 315, A134).  

In Audit Assistant we provide the ability to identify and analyse risk right through the audit process, but the emphasis is on identifying risk during the planning process so that the job may may completed as efficiently as possible - focussing on the identified risks.

Risk is flagged by clicking the star icon which appears next to all trial balance items and all comments.  Flagging of risks may be done at any point where a comment has been added. Here for instance on the Sales and Income System page:


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Trial balance items may also be flagged - individual items or group totals. The items flagged comes down to, like materiality, the auditors judgement. 

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What kinds of risk are there?

 

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