Minimising Audit Risk
A misstatement of a given size might be material for a small company, whereas the same dollar misstatement could be immaterial for a larger one.
–Bases are needed for evaluating materiality
Net income before taxes is normally the most commonly used base, but other possible bases include current assets, total assets, current liabilities, and owners’ equity.
–Qualitative factors also affect materiality
Certain types of misstatements are likely to be more important to users than others, even if the dollar amounts are the same
Because Auditors determine if there is a misstatement and the level of material in it, I think it’s best to develop an audit plan of action. According to PCAOB, “The effect of the misstatement on segment information, for example, the significance of the matter to a particular segment important to the future profitability of the company, the pervasiveness of the matter on the segment information, and the impact of the matter on trends in segment information, all in relation to the financial statements taken as a whole.” https://pcaobus.org/Standards/Archived/PreReorgStandards/Pages/Auditing_Standard_14_Appendix_B.aspx
The three main factors that affect an auditor’s judgment about materiality includes materiality is a relative rather than an absolute concept. Bases are needed for evaluation. It is necessary to have bases for establishing whether misstatements are material. Qualitative factors also play a factor, especially misstatements that involve frauds. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations.
Audit risk is the risk that the auditor will express an inappropriate audit opinion on financial statements that contain material misstatements. Limited segregation of duties. No single person should be responsible for the authorization of transactions, recording of transactions, and custody of the impacted assets of transactions. The opportunity for errors or fraud is higher than in larger corporations where incompatible functions are often handled by different people. Smaller organizations need to implement compensating controls to help ensure the objectives are met, such as oversight, supervision, and monitoring by management or those charged with governance.