Calculation and risk assessment for Bovar's Companny

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August21, 2015

Introduction

 When an organization is being audited it is important to have a level of riskand a level of materiality that is acceptable for the organization. Theseamounts are established by the professional opinion of the auditor. It is basedon the understanding of the entity, the environment, and the relationshipbetween them. The level of risk and materiality will guide the audit levels ofsampling and analysis of the financial material.

Relationship between Risk andMateriality

 Risk in an audit is that the auditor may unknowingly fail to give the properopinion of the financial statements because of material misstatements that havenot been discovered during an audit (AICPA, 2015).  The materiality of astatements is determined if a reasonable person would have changed theiropinion of the financial statements if the mistake had not been reported. Ifthere would have been a different opinion that the mistake is material. It isimportant 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 guidethe level of sampling, the number of transactions reviewed, what accountbalances to review, and what questions should be asked. This will also form thenumber different types of analysis that is done on the financial statements.

How are Risk and MaterialityRelated

 The relationship between risk and materiality is inverted. When there is ahigher 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 ableto be revised. This would than lower the risk of the audit. The level ofmateriality can change based on the level of internal controls, and the overallentity.

Integration of Materiality andRisk in the Audit.

 The level of materiality and risk will influence the level of detail the auditwill look at. The level of sampling and testing will be influenced by the levelof materiality and risk (AICPA, 2015). The account balances and the dollaramount of transactions will also be influenced by the level. The auditor willneed to be aware of the inherent risk which is the susceptibility thattransactions have to misstatements. The control risk is when a misstatement canoccur 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 ofthese levels of risk will need to be assessed in the planning of the audit. Itwill determine the detail discovery level.

Example of a Statement for Riskand Materiality

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

Conclusion

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

Reference

AICPA.org, (2015),Audit Risk and Materiality inConducting and Audit.Retrievedfrom

 http://aicpa.org

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

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

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Apa format paper with proper apastyle of discussion above:

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

Based on the groupdiscussion, apply a risk assessment technique to decision making by using thefollowing example:

Assume that you are goingto use nonstatistical sampling to evaluate the results of accounts receivableconfirmation for the Bovar audit. Results from previous audits have beenexcellent. Because of the high quality of the controls at Bovar, you havedecided to use an acceptable risk of incorrect acceptance of 10%. There are3,000 accounts receivable with a gross value of $9,601,883. You have decidedthat an overstatement or understatement of more than $150,000 would beconsidered material.

Complete the following:

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

Regards,