Chapter 1 – The Demand for Audit and Other Assurance Services
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English

Chapter 1 – The Demand for Audit and Other Assurance Services

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Materiality and RiskChapter 9©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 1Learning Objective 1Apply the concept of materialityto the audit.©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 2MaterialityIt is a major consideration in determiningthe appropriate audit report to issue.©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 3MaterialityThe auditor’s responsibility is to determinewhether financial statements arematerially misstated.If there is a material misstatement,the auditor will bring it to the client’sattention so that a correction can be made.©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 4Steps in Applying MaterialityStep Set preliminary judgment1 about materialityPlanningextentAllocate preliminary of testsStep judgment about2 materiality tosegments©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 5Steps in Applying MaterialityStep Estimate total3 misstatement in segmentStep Estimate theEvaluating4 combined misstatementresultsCompare combinedStepestimate with judgment5about materiality©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 6Learning Objective 2Make a preliminary judgmentabout what amounts toconsider material.©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 7Set Preliminary Judgment ...

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Materiality and Risk
Chapter 9
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 1Learning Objective 1
Apply the concept of materiality
to the audit.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 2Materiality
It is a major consideration in determining
the appropriate audit report to issue.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 3Materiality
The auditor’s responsibility is to determine
whether financial statements are
materially misstated.
If there is a material misstatement,
the auditor will bring it to the client’s
attention so that a correction can be made.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 4Steps in Applying Materiality
Step Set preliminary judgment
1 about materiality
Planning
extent
Allocate preliminary of tests
Step judgment about
2 materiality to
segments
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 5Steps in Applying Materiality
Step Estimate total
3 misstatement in segment
Step Estimate the
Evaluating
4 combined misstatement
results
Compare combined
Step
estimate with judgment
5
about materiality
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 6Learning Objective 2
Make a preliminary judgment
about what amounts to
consider material.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 7Set Preliminary Judgment
About Materiality
Auditors decide early in the audit
the combined amount of misstatements
of the financial statements that would
be considered material.
This preliminary judgment is the maximum
amount by which the auditor believes the
statements could be misstated and still not
affect the decisions of reasonable users.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 8Factors Affecting Judgment
Materiality is a relative rather
than an absolute concept.
Bases are needed for
evaluating materiality.
Qualitative factors also
affect materiality.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 9Guidelines
Accounting and auditing standards
do not provide specific materiality
guidelines to practitioners.
Professional judgment is to be used
at all times in setting and applying
materiality guidelines.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 10