Assessing Materiality and Risk Simulation 1

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Assessing Materiality and Risk Simulation
Debbie Griffis, Christie Maday, Ashley Ralph, Tonya Reinholdt, Tony Rauda ACC 490
February 6, 2012
Kelly O'Leary

Assessing Materiality and Risk Simulation
In this paper we are going to look at four questions that deal with the assessing materiality and risk simulation. The first question that we will be looking at is why certain accounts have to be audited 100%. Then after that we will look at why materiality is only allocated to those accounts that are sampled. Next we will answer if any component of audit risk is within the control of the auditor. Last we will look at how the three risks that make up audit risk are inter-related. Overall this paper will give us a better understanding of the simulation..

Certain accounts need to be audited 100% because those accounts are the most important to the industry which the company operates and usually contain fewer transactions which are easy to verify. The accounts which are usually audited 100% are; cash accounts, lines of credit and any intangibles. These accounts are important because they are the ones that can be easily missta

According to Generally Accepted Accounting principles, what is material are items that could individually or collectively influence the economic decisions of users, taken on the basis of financial statements. The reason that materiality is allocated only to those accounts that are sampled is because the accounts selected on a test basis were selected to be sampled for evidence supporting the financial statements. Test basis when stated, indicates that less than 100% of the evidence was examined. Accounts which are selected on a test basis merit the testing based on audit risk, control risk, and inherent risk assessments.

Of all the components of audit risk (inherent, control, and detection risk), only detection risk is within the control of the auditor. Inherent and control risks are primarily the responsibility...
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