What is the audit objective?
It is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, thereby enabling the auditor to express an opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework.
When are ROMMs identified?
In the planning stage of the audit process
What happens in the planning stage of the audit?
- Obtain an understanding of the entity and its environment including internal control
- Develop the audit strategy
- Develop the audit plan
Audit strategy includes:
- Calculating materiality
- Identify and access the RoMMs at the overall financial statement level and at the assertion level
- Respond to the RoMM at the overall financial statement level
ISA 300
Planning an audit of financial statements
What are the 3 things set by the auditing strategy?
- scope
- timing
- direction of the audit
This will guide the development of the audit plan
Matters which affect the audit strategy:
- Management and their integrity
- Information system
- Framework
- Industry Regulation
- Materiality
- RoMMs
- Deadlines
- Events
ISA 320
Materiality in planning and performing an audit
Misstatements 4 categories
(Quantitative)
1. Amount
(Qualitative)
2. Classification
3. Presentation
4. Disclosure
Types of Materiality
- Qualitative (IFRS requirements)
- Quantitative (Amounts)
Categories for Quantitative Materiality
Planning Materiality (Maximum Amount) used in the planning and in the concluding stage.
Performance Materiality (Aggregated Misstatements) used in the performing stage. Helps identify RoMMs in the financial statements.
What are the two levels of RoMMs?
RoMMs at assertion level
RoMMs at overall financial statement level
System of Internal Controls: COSO Framework
- Control environment
- Control activities
- Monitoring the system of internal controls
- Risk assessment process
- Information system and communication
Audit Risk Formula
Inherent Risk x Control Risk x Detection Risk = Audit Risk
Inherent Risk
Disclosure/Transactions/Account balances could be misstated because of its nature.
Revenue has an inherent risk of material misstatement due to fraud
Control Risk
Something is misstated because the controls which have been put in place are not effective/working
Detection Risk
Auditor does not detect the RoMMs
Is it at an acceptable level?
Factors of the entity and its environment
- Organisational Structure
- Ownership, governance and business model
- Industry and regulations
- Measures to assess financial performance
- Financial reporting framework
- Accounting policies
Inherent Risks associated with the organisational structure
Organisational Structure - Consolidated F/S
- Non-compliance with IFRS
- Intra-group transactions not eliminated
- Different accounting policies
- Related party risks: non disclosure and not at arms length transactions
- Goodwill
Multiple Branches:
- Theft at branches - Inventory misstated
Inherent Risks associated with ownership, governance and business model:
- Related Party Risks
- Aggressive strategy -> fraudulent reporting to achieve the strategies
Inherent Risk associated with the industry and regulations
- Non-compliance with laws and regulations (NOCLAR) - APA
Companies Act
Tax
Foreign Regulations
Listing requirements
Going concern issues
Highly Competitive Industry
Inherent Risk associated with measures to access financial performance
Pressure to achieve -> fraudulent reporting to achieve goals and performance targets
Inherent Risk associated with financial reporting framework
Just because there is a framework there is a risk of non-compliance with IFRS
Inherent Risk associated with accounting policies
These are “business made”.
Biasness
