ACT 3142 – AUDIT II

1. ACT 3142 – AUDIT II DR. ZULKARNAIN BIN MUHAMAD SORI B. Acc (Hons.)(UPM), MSc. (UPM), PhD (Cardiff, UK), CA(M), MCMI(UK) ROOM: 08F1 TEL: 03-89467742, 89486188 (Fax) E-MAIL: zms@putra.upm.edu.my

2. AUDIT II • Students Centered Learning • Teach student how to learn • Student would search the information / knowledge on their own • Lecturer as a coach • Mix of approaches: • Lecture • Problem Based Learning

3. MATERIALITY & RISK Learning Objectives • Understand the concept of materiality • Learn the steps of applying materiality in audit • Understand the concepts of audit risk and auditor business risk • Learn the form and components of the audit risk model • Understand the relationship between materiality and audit risk

4. MATERIALITY & RISK Learning Objectives (Cont.) • Understand how to use the audit risk model • Learn the auditor’s assessment of risks and material misstatement due to fraud and error • Learn the auditor’s responsibility to document and communicate fraud related matters • Learn the limitation of the audit risk model.

5. PROBLEMS FOR NEXT CLASS PROBLEMS • PAGE 92 = 3.35 • PAGE 94 = 3.39 DISCUSSION CASE • PAGE 94-95 = 3-40 Note: Students to discuss their findings on the above problems and case.

6. MATERIALITY • Definition – ISA320 • Professional standards – provide little specific guidance on how to assess materiality. • Audit firms – own policies & procedures.

7. MATERIALITY • Steps in applying materiality: • Step 1: Establish a preliminary judgment about materiality • Step 2: Allocate the preliminary judgment about materiality to account balances or classes of transaction • Step 3: Estimate likely misstatements and compare totals to the preliminary judgment about materiality

8. AUDIT RISK • Two types of risk: • Audit risk • Auditor business risk • Audit Risk Model • AR = IR X CR X DR • Relationship Between Materiality and Audit Risk

9. USE OF THE AUDIT RISK MODEL • Three steps: • Setting a planned level of audit risk • Assessing inherent risk and control risk • Solving the audit risk equation for the appropriate level of detection risk.

10. ASSESSING CLIENT BUSINESS RISKS • Circumstances that affect business risks and risks of material misstatement • Thorough understanding of the industry: • The critical issues facing the industry • The significant industry business risks • The structure and profitability of the industry • The relationship between the industry and the broad economic business environment

11. ASSESSING THE RISKS OF MATERIAL MISSTATEMENT DUE TO FRAUD OR ERROR • What is error? • What is fraud? • Fraudulent financial reporting? • Misappropriation of assets?

12. FRAUD RISK FACTORS • Definition – ‘Fraud risk factors’ • Fraud risk factors – presence of material misstatements => 3 categories: • Mgt’s characteristics & influence over the control environment • Industry conditions • Operating characteristics and financial stability

13. FRAUD RISK FACTORS • Fraud risk factors – relate to misappropriation of assets => 2 categories: • Susceptibility of assets to misappropriation • Controls

14. FRAUD RISK FACTORS • The auditor’s response to the assessment of risks • Evaluation of whether misstatement indicates fraud • Documentation of fraud risk factors • Communication about fraud to management, and others

15. LIMITATIONS OF THE AUDIT RISK MODEL • Audit risk model => a planning tool • Actual level of audit risk might be greater • Combined risk assessment for IR and CR

16. THANK YOU