Case 7.

1


Anne Aylor. Inc

Planning Materially Assessment











AU-C 300
Planning an Audit:
Involvement of Key Engagement Team Members
Preliminary Engagement Activities
Planning Activities
Determining the Extent of Involvement of Professionals
Additional Considerations in Initial Audit Engagements
Documentation

Q1.
a. Different users for different purposes to use financial information. Not all
parts of the financial statements are equally relevant to all users. For instance,
stockholders are more concerned with profit growth and revenue than
creditors.
b. Materiality is a relative rather than an absolute concept. Based on different
operation environment, the materiality threshold will vary to influence users
of the financial statement. For example, the magnitude of a misstatement that
will influence users of the financial statement will change based on how the
entity is performing in the industry.
c. Most misstatements affect both a balance sheet an income statement account
due to the dual entry method. So, auditors must design a audit plan to detect
the smallest misstatement that will influence users of the financial statement.
d. A risk of management fraud will affect directly the accounting amount, such
as net income. For example, asset accounts will be overstated and liability
accounts will be understated.
e. The objective of setting tolerable misstatement is to provide reasonable
assurance that the financial statements are fairly presented in all material
respects at the lowest cost. So, auditors may design a higher tolerable
misstatement to minimize cost for the less evidence that will be needed.
Conversely, the lower the tolerable misstatement the more evidence that will
be needed.
f. We cannot expect every account that will be misstated by an amount equal to
its tolerable misstatement. In the fact, it is more likely that most accounts will
be misstated by an amount greater then its tolerable misstatement while
others may be misstated by an amount less than its tolerable misstatement.
g. Planning for an audit helps the auditor fast and effectively perform the audit
before starting an audit. Auditors are required to design an audit program
because auditors must consider the risk of material misstatement. Thus,
Auditors should have trial balance amounts to establish materiality
thresholds for the current year audit.