Assessing Materiality and Risk Simulation

Good Essays
TEAM B
TEAM B
-------------------------------------------------
Assessing Materiality and Risk Simulation

University of Phoenix ACC/491 Dwayne Thompson March 10, 2013
-------------------------------------------------
Assessing Materiality and Risk Simulation

University of Phoenix ACC/491 Dwayne Thompson March 10, 2013

The objective of the audit of financial statements is to enable the auditor to express an opinion if the financial statements are prepared in accordance with an identified financial reporting framework. The reason that materiality is allocated to those accounts sampled because materiality represents the magnitude of an omission or misstatement of an item in a financial report. The three function of the audit risk are inherent risk (IR), control risk (CR), and detection risk (DR). Every level of audit risk has an opposite connection that exists between assessed levels of controls, inherent risk, and level of detection risk Why do certain accounts have to be audited 100%? Accounts need to be audited 100% so the users of the financial statements can rely on the information and be able to make decisions for investment purposes. It also helps management make sure the company is profitable as well as following rules and regulations of the accounting standards and policies. Auditing accounts are done to protect the investors, shareholders, banks, and to give assurance that the information is true and correct. Account types such as inventory, accounts payable, property, plant and equipment are not required to fully be audited as it is a time-consuming process. Accounts that are audited 100% are accounts most relevant to the industry that the company represents. Why is materiality allocated only to those accounts that are sampled? The Financial Accounting Standards Board (FASB), defines it in statement of



References: Assertions, Audit Risk and Materiality. Bradley. Retrieved by Jamie Casey from http://www.hilltop.bradley.edu/~simon/atg457/chapter04.doc Austin Community College District. Detection Risk. Retrieved by Jamie Casey from http://www.austincc.edu/audit/glossary/d.php Boynton, W.C., & Johnson, R.N. (2006). Modern Auditing: Assurance Services and the Integrity of Financial Reporting (8th ed.), Hoboken, NJ: Wiley. Frats. The World of Risk. Retrieved by Jamie Casey from http://www.frats.com/essays/74742.html Oregon State University. Chapter 09-Materialtiy and Risk. Retrieved by Jamie Casey from http://www.classes.bus.oregonstate.edu/winter-06/ba427/ch9%20solutions.doc Phoenix Accountants. Materiality. Retrieved by Jamie Casey from http://www.phxaccountant.com/about/karpinski-and-jacobsen/ U.S. Government Accountability Office. Retrieved by Jamie Casey from http://www.gao.gov/special.pubs/famv1_.pdf University of Phoenix. (2013). Assessing Materiality and Risk Simulation. Retrieved from University of Phoenix, ACC491 website.

You May Also Find These Documents Helpful

  • Satisfactory Essays

    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..…

    • 585 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    The concept of materiality is important in the context of auditing. Materiality is a function of the time, the situation, and the people involved. Below I will explain why certain accounts have to be audited 100 percent and why materiality is allocated only to those accounts that are sampled. I will also explain if there is any component of audit risk within the control of the auditor. Lastly, I will explain how the three risks that make up audit risk inter-relate.…

    • 451 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Kotchetova Paper For Midyear

    • 10508 Words
    • 52 Pages

    Elliott, R.K., Rasmussen, T.A., Rucker, S.C., Strange, J.T., and A.L. Williamson. 1999. The Financial Statement Audit: Why a New Age Requires an Evolving Methodology. KPMG Peat Marwick LLP.…

    • 10508 Words
    • 52 Pages
    Good Essays
  • Good Essays

    Engagement Letter

    • 637 Words
    • 3 Pages

    The purpose of the audit is to express an opinion about whether your consolidated financial statements are fairly presented, in all material respects, in conformity with accounting principals generally accepted accounting principals.…

    • 637 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Our audit opinion will be based on our examination, made on a test basis, of your records, documents, assets, and equities. We will not examine all transactions, assets, or equities in detail, and the examination should not be relied on to detect all errors, fraud, or illegal acts that may have taken place. Notwithstanding, should we discover material misstatements resulting from error, fraud, or illegal acts during our audit, they will be disclosed to you. Please note that management of the company has the primary responsibility for maintaining adequate accounting records, for the safeguarding of assets, and for the preparation of accurate financial statements.…

    • 453 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    The nature and function of audit is multifaceted with a comprehensive broad objective; to provide users with complete, relevant and reliable information that assist them in making business decisions. More commonly the users of this information are focused on accurate financial statements and an evaluation of managements assertions regarding the oversight of reporting, internal controls and presentation of that information in accordance with generally accepted accounting principals (GAAP) as well as mandated legislation where applicable.…

    • 1005 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Audit Exam

    • 9534 Words
    • 39 Pages

    After general audit objectives are understood, specific audit objectives for each account balance on the financial statements can be…

    • 9534 Words
    • 39 Pages
    Good Essays
  • Better Essays

    References: Louwers, T.J., Ramsay, R.J., Sinason, D.H., & Strawser, J.R. (2007). Auditing and assurance services. New York: McGraw-Hill.…

    • 2082 Words
    • 9 Pages
    Better Essays
  • Satisfactory Essays

    Careers In Accounting

    • 570 Words
    • 2 Pages

    “Also, auditors inspect accounting systems and account books for efficient use as well as the use of accepted accounting procedures, and organize and maintain all personal and business financial record. Furthermore, auditors assess financial operations and make best-practices recommendations to the management of a company such as ways to reduce cost, enhance revenues, and improve profits.” (Roofing and Gutters Company 10-29-2014).…

    • 570 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    An auditor needs to consider planning the audit and evaluating financial statements with the generally accepted accounting principles regulations. If an entity is considered less material to financial users then it is considered to be a materiality entity. Under the materiality principle, certain accounting standards may be ignored if it does not conflict a readers understanding on a financial statement. The total asset of an item will determine if the item should be included in the balance sheet and this item would be identified as material.…

    • 1238 Words
    • 5 Pages
    Satisfactory Essays
  • Powerful Essays

    Auditing in general is an organized process of accurately finding and assessing statements regarding financial records to determine the degree of accuracy between those statements and established criteria and communicate the results to interested users and or the public.…

    • 1266 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Auditing

    • 756 Words
    • 4 Pages

    1.21 What is an audit? Required If an audit is none of the above, what is an audit designed to achieve? The primary objective of an audit is to express an opinion as to whether the financial report is prepared, in all material respects, in accordance with an identified financial reporting framework. An auditor is setting out to achieve enhanced credibility of information disclosed to increase reliability for the users of the financial statements. A definition from the Committee on Basic Auditing is as follows: A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. The auditor only considers going concern to the extent that it is met so that the accounts can be prepared on a going concern basis. The auditor (unlike the directors) makes no positive assertion about the going concern of the company.…

    • 756 Words
    • 4 Pages
    Good Essays
  • Best Essays

    Audit and Auditing Process

    • 2013 Words
    • 9 Pages

    Auditing is defined by the American Accounting Association or AAA as “a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users” (cited in Turney et al p. 108). From that definition, it is evident that the auditing process consists of three elements: evidence collection and evaluation; comparison of collected evidence with established criteria and; results-sharing with interested parties. In obtaining evidence for auditing purposes, a systematic approach is taken. A well-planned, logical approach is vital so that important aspects of the process are not missed or bypassed. On the other hand, the rationale behind comparing assertions of a firm and control structure is to determine the authenticity of those assertions and whether they truly reflect its transactions. Lastly, the most important aspect and end goal of the auditing process is to provide true and accurate information to interested parties, such as shareholders, creditors and investors, from which they will find basis in their future transactions and decisions involving the firm. The importance of the auditing process today, as defined above, cannot be argued against. It does not only ensure that firms keep track and control their financial activities, but it forms the rudimentary foundation of businesses and on a larger scale, the economy. Without the auditing process to ensure that the public put their trust on business entities and their activities, the economy will stagnate and perhaps eventually collapse.…

    • 2013 Words
    • 9 Pages
    Best Essays
  • Powerful Essays

    Bibliography: ……………………………………………………………………………………………………………………………………11 STAGE B: ASSESSING THE PRELIMINARY LEVEL OF CONTROL RISK ASSESSING CONTROL RISK .62 Section 326, Evidential Matter, states that most of the independent auditor 's work in forming an opinion on financial statements consists of obtaining and evaluating evidential matter concerning the assertions in such financial statements. These assertions are embodied in the account balance, transaction class, and disclosure components of financial statements and are classified according to the following broad categories: Existence or occurrence Completeness Rights and obligations Valuation or allocation (measurement) Presentation and disclosure In planning and performing an audit, an auditor considers these assertions in the context of their relationship to a specific account balance or class of transactions. .63 The risk of material misstatement in financial statement assertions consists of inherent risk, control risk, and detection risk. Inherent risk is the susceptibility of an assertion to a material misstatement assuming there are no related controls. Control risk is the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity 's internal control. Detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion. .64 Assessing control risk is the process of evaluating the effectiveness of an entity 's internal control in preventing or detecting material misstatements in the financial statements. Control risk should be assessed in terms of financial statement assertions. .65 After obtaining the understanding of internal control, the auditor may assess control risk at the maximum level for some or all assertions because he or she believes controls are unlikely to pertain to an assertion or are unlikely to be effective, or because evaluating the effectiveness of controls would be inefficient.…

    • 3038 Words
    • 13 Pages
    Powerful Essays
  • Best Essays

    Auditing Strategy

    • 1873 Words
    • 8 Pages

    Financial audit is about the opinion expressed by auditor with all material respects and any relevant legislation for instance corporation act 2001. A good financial audit should be provided with true and fair view. It is responsible for auditors to provide a truth and fairness opinion as well as information involved in a financial report (MORONEY, CSMPBRLL & HAMILTON 2011).…

    • 1873 Words
    • 8 Pages
    Best Essays