Calculation and risk assessment for Bovar’s Companny

/in /by

Thi is part of a group member discussion  that can use for next paper

August
21, 2015

Introduction

 
When an organization is being audited it is important to have a level of risk
and a level of materiality that is acceptable for the organization. These
amounts are established by the professional opinion of the auditor. It is based
on the understanding of the entity, the environment, and the relationship
between them. The level of risk and materiality will guide the audit levels of
sampling and analysis of the financial material.

Relationship between Risk and
Materiality

 
Risk in an audit is that the auditor may unknowingly fail to give the proper
opinion of the financial statements because of material misstatements that have
not been discovered during an audit (AICPA, 2015).  The materiality of a
statements is determined if a reasonable person would have changed their
opinion of the financial statements if the mistake had not been reported. If
there would have been a different opinion that the mistake is material. It is
important that the materiality of the information is at a reasonable level.
This will guide the level of depth that the audit will undertake. It will guide
the level of sampling, the number of transactions reviewed, what account
balances to review, and what questions should be asked. This will also form the
number different types of analysis that is done on the financial statements.

How are Risk and Materiality
Related

 
The relationship between risk and materiality is inverted. When there is a
higher level of materiality there is a lower level of risk in the organization
(AICPA, 2015). The level of materiality can also be reevaluated for the audit.
If the auditor feels that the level of materiality is to low it might be able
to be revised. This would than lower the risk of the audit. The level of
materiality can change based on the level of internal controls, and the overall
entity.

Integration of Materiality and
Risk in the Audit.

 
The level of materiality and risk will influence the level of detail the audit
will look at. The level of sampling and testing will be influenced by the level
of materiality and risk (AICPA, 2015). The account balances and the dollar
amount of transactions will also be influenced by the level. The auditor will
need to be aware of the inherent risk which is the susceptibility that
transactions have to misstatements. The control risk is when a misstatement can
occur and not be discovered in a timely manner so that it can be corrected.
Detection risk is the risk of the misstatement not being discovered. All of
these levels of risk will need to be assessed in the planning of the audit. It
will determine the detail discovery level.

Example of a Statement for Risk
and Materiality

 
An example of a statement for risk and materiality is “Because of the nature of
audit evidence and the characteristics of fraud, the auditor is able to obtain
reasonable, but not absolute, assurance the material misstatements are
detected.” (PCAOB, 2015).

Conclusion

 
The lower the level of risk the higher the level of materiality. The
relationship between the two items is inverted. The level of materiality and
risk is based on the professional opinion of the auditor because of the
knowledge of the entity, the environment of the industry, and other important
factors.  These factors are how the auditor plans the level of detail that
the audit will go into. The sample size, timing, and account balances that will
be audited will be based on this information. They are both very important and
the basis of which audits is performed.

Reference

AICPA.org, (2015),Audit Risk and Materiality in
Conducting and Audit.Retrieved
from

 
http://aicpa.org

PCAOB, (2015),AU Section 312,Audit Risk and Materiality in
Conducting an Audit, retrieved

 
From http://pcaobus.org/Standards/Auditing/Pages/AU312.aspx

Follow the guidelines in writing
paper and answering questions below:

APA format for citation and
references

Apa format paper with proper apa
style of discussion above:

2 or more reference in same format:

1200 to 1500 words just to explain answers and how the
calculations was done in details

Based on the group
discussion, apply a risk assessment technique to decision making by using the
following example:

Assume that you are going
to use nonstatistical sampling to evaluate the results of accounts receivable
confirmation for the Bovar audit. Results from previous audits have been
excellent. Because of the high quality of the controls at Bovar, you have
decided to use an acceptable risk of incorrect acceptance of 10%. There are
3,000 accounts receivable with a gross value of $9,601,883. You have decided
that an overstatement or understatement of more than $150,000 would be
considered material.

Complete the following:

  • Calculate the required
    sample size using the following formula:
    • Sample size = (book value
      of population / tolerable misstatement) x assurance factor
      • Assurance factor:
        • 5%
          ARIA = 3
        • 10%
          ARIA = 2
        • 20%
          ARIA = 1
  • Assume that instead of
    good results from previous audits, Bovar had poor results and the controls
    in place were questionable. Discuss the following:
    • How would this affect
      your sample size?
    • How would you use this
      information in your sample size determination?
    • How would you select the
      accounts for testing using systematic selection?

Regards,