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Assessing Materiality And Risk Simulation

Essay by   •  December 18, 2010  •  525 Words (3 Pages)  •  1,527 Views

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In this simulation, our team did an audit process by selecting a base to calculate Planned Materiality. We allocated the Materiality to the relevant accounts and set a Tolerable Misstatement for each account. Then, we assessed Audit Risk, Inherent Risk, and Control risk to derive Detection Risk. As a result of these decisions, we derived Sample Size and Sampling Interval, and set an Expected Misstatement.

We learned that certain accounts have to be audit 100 percent. Some of these accounts are cash, intangible, and line of credit. These accounts are not samples accounts. Audit sampling is an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.

In addition, we were to decide Audit Risk, Inherent Risk, Control Risk, and Expected Misstatement for Sweet Truths. We decided to set Audit Risk High, Inherent Risk low, and Control Risk low. Setting Audit Risk High seems to indicate that we are convinced about the integrity of the management of Sweet Truths. The higher the Audit Risk, the lesser the evidence that has to be gathers by the auditor. Setting Inherent Risk low indicates that the confectionery industry is stable and we do not perceive any risks. The lower the Inherent Risk, the greater the evidence that the auditors needs to gather. Setting Control Risk Low indicates that we are relying on the internal control procedures that are in place in the organization. Control Risk can never be zero since it is advisable for the auditor to avoid placing complete reliance on the internal controls of the firm. Expected Misstatement is the amount of misstatement the auditor believes exists in the population.

Audit risk is the risk of a material misstatement of a financial statement item in the unaudited financial statements and the risk that the misstatement will not be detected by the auditor. The risk of material misstatement

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