Define and explain materiality and performance materiality
Materiality
Misstatements are considered to be material if they,
individually or in summary,
could reasonably be expected to influence the economic decision of users.
Both quantity and quality should be considered by auditors.
The determination of materiality will always be a matter of judgement
and will depend on the level of audit risk.
Performance Materially
The purpose of PM is to reduce the probability of the aggregate of uncorrected
and undetected misstatements exceeds materiality for the financial statements as a whole.
Performance materiality is normally set at a level lower than overall materiality.
It is used for testing individual transactions, account balances and disclosures.
Interim and final audit
The interim audit is that the audit which takes place before the year end.
There is no required to undertaken an interim audit;
factors to consider depend on size and complexity of the company
and is used to usual because of time pressure.
The final audit will take place after the year end
and concludes an opinion on the financial statements for the whole year.
Purpose of engagement letter and list 4 items in engagement letter
Purpose of engagement letter
An engagement letter provides a written agreement of terms of the audit engagement
between the auditor and the client
and helps to avoid misunderstanding with respect to the audit.
Content of engagement letter
Objective and scope of audit
The responsibility of the auditors
The responsibility of management
Financial reporting framework
Five fundamental principles
Integrity-to be straight forward and honest in
all professional and business relationships.
Objective-to not allow bias conflict of interest or undue influence of others
to override professional or business judgments.
Professional competence and due care-to maintain professional knowledge and skill
at the level required to ensure that a client receives competent professional service.
Confidentiality-not to disclosure any such information to third partied
without proper authority nor use the information for personal advantage.
Professional behavior- to comply with relevant laws and regulations
and avoid any action that discredits the profession.
Objective of quality control and relevant elements of quality control
To provide the audit firm with reasonable assurance that：
The firm and personnel comply with professional standards
and applicable legal and regulatory requirements.
Reports issued by the firm or engagement partners are appropriate in the circumstances.
Limitations of using analytical procedures at the planning stage
The auditor needs a good understanding of the business
to interpret the results of analytical procedures.
This may take some time to acquire for a new client.
If analytical procedures are performed mechanically,
apparent consistency of results year-on-year may in fact include a material error.
Effective analytical procedures rely on good quality
and reliable information being available from the client
which may not always be available.
When planning is before the end of reporting period,
available information is likely to be incomplete.
For example, revenue and expense accounts
will include transactions for less than the entire period.
For matters to consider whether a deficiency in internal control is significant?
The likelihood of the deficiencies leading to material misstatements
in the financial statement in the future.
The importance of the controls to the financial reporting process.
The susceptibility to loss or fraud of the related asset or liability.
The subjectivity and complexity of determining estimated amounts