Audit Risk and Materiality: It’s Impact on Auditors Responsibilities
Chapter One
OBJECTIVE OF THE STUDY
The main purpose of this research work is:
- To ascertain how materiality should be considered by an auditor when planning and evaluating the results of an audit
- How an auditor can examine audit risk assessment process to limit it to an appropriate level, the risk that an unqualified opinion will be issues when an material misstatement exist.
- To verify the factors which an auditor may consider to allocate planning materiality
- To identify how materiality arises depend on the size and nature of an item(s) and the particular circumstance.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
CONCEPT OF MATERIALITY
Materiality is one of the basic and major concepts of auditing. Auditing and Assurance Standard (AAS) (Hitherto) known as standard Auditing practices (SAAPs)13, “Audit Materiality” states that the concept either individually or in the aggregated are relatively important for true and fair presentation of the financial information in conformity with recognized accounting policies and practices.
According to Antle R. and Naleduffi B. 1991: There are no sets of rules or prescriptions that may be applied consistently to determine materiality in all circumstances materiality is a relative terms.
What may be material in one circumstance may not be material in another. The assessment is a matter of professional judgment and experience of the auditor. In this research work, concept of materiality concept audit risk, auditor’s consideration of materiality while making an opinion on the financial statements, etc. are discussed in brief. The matters that are to be considered among other things, by the auditor to decide on materiality are also outlined.
Materiality is one of the basic and important concepts of auditing. Auditing and Assurance Standard (AAS) (Hitherto known as Standard Auditing Practices) (SAPs) -13 “Auditing materiality”, establishes standards on the concept of materiality and its relationship with audit risk, AAS-6 (revised), “Risk Assessments and internal control”, provides guidance and establish Standards on the procedures to be followed to obtain an understanding of the accounting and internal control systems and on audit risk and its components.
According to Awadallah, E, 2006: The true and fair presentation of the financial statements depends, among other things, upon the concept of materiality, materiality is a circumstance may not be material in another. The consideration of materiality is the matter of professional judgment and experience of the auditor. There are number of matters that are to be considered to decide on materiality. But, however, there are no sets or rules or prescriptions that may be considered and applied consistently to decide on materiality in all circumstances, in this paper some matters are discussed, which may be considered by the auditor while making materiality Assessments.
According to Beathe Brandt and Fearly (2004) materiality concept is one of the most important concept of auditing. The materiality concept should be considered by the auditor before making an opinion on the financial statements. The client or management of the entity has the responsibility to ensure that whether the financial statements reveals all relevant material information.
According to Beattie Fearnley, and Brand, (2000) when material information is not disclosed or materially misstated, the financial statements without considering materiality concept. The assessment of what is material is the matter of professional judgment and experience of the audit AAS-13 “Audit materiality”, establishes standards on the concept of materiality and its relationship concept auditing.
According to it “information is material if its misstatement (i.e. Omission or erroneous statement) could influence the economic decision of users taken on the basis of the financial information. Materiality depends on the size and nature of the item, judged in the particular circumstances of its misstatement. Thus, materiality provides a threshold or cutoff point rather than being a primary qualitative characteristic which the information must have if it is to be useful”
There are no specific rules or prescriptions that can be followed in all circumstances to assess materiality. It is the matter for the auditor to decide whether a particular misstatement or an item has material impact on the financial statements or not.
AUDIT OBJECTIVE AND MATERIALITY
The objective of an audit of financial statements; prepared within a framework of recognized accounting policies and practices and relevant statutory requirements, if any is to enable an auditor to express an opinion on such financial statements. Such opinion helps determination of the true and fair view of the financial position and operating results of an enterprise. The user should not assume that the auditor’s opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affair of the enterprise. The materiality concept has an important role in relation to the true and fair presentation of the financial statements. Part II of schedule VI to the companies Act, 1956 requires that the profit and loss account should disclose every material feature. The concept of materiality recognizes that some matters, either individually or in the aggregate, are relatively, important for true and fair presentation of the financial information in conformity with recognized accounting policies and practices. The auditor should consider materiality at both the overall financial information level and in relation to individual account balances and classes of transactions- it is necessary for the auditor to obtain sufficient appropriate audit evidence which may be influenced by the materiality of the item, before making an opinion on the financial statements.
CHAPTER THREE
RESEARCH DESIGN AND METHODS
RESEARCH DESIGN
For the purpose of this study, the researcher made use of certain methods and designs. These involves the planning and the implementation of this plan in generating information. Which will be used in investing the study, analysis of financial ratios as aid to economic analysis. The plan will include method and sources of data collections and also determination of sample size.
The researcher of this study was conducted in first bank of Nigeria Plc. Enugu to enable the research obtain adequate information for this study
DESCRIPTION OF RESPONDENTS
This seeks to describe the scientific methods and techniques employed in the process carrying out this research. The research covers design method of data collection, determination of sample size validation, reliability of data instruments of data collection. The respondents includes thirteen (13) staffs in internal audit department and twenty (20) staffs in the accounting department in First Bank of Nigeria Plc Okpara avenue Enugu.
SOURCES OF DATA
Primary Data
The researcher made use of primary data collection through a field survey of the staff of the accounting and internal audit department on first bank of Nigeria Plc. The researcher also, conducted oral interview with some senior official of the bank in the audit department through the aid of the oral interview, some information that was of great help for this study was contained in the structural questionnaires
Secondary data
These are research reports that use primary data to solve research problems, written for scholarly and professional audiences. Researcher read them to keep up with their filed and use what they read to frame problems of their own by disputing other researcher’s conclusions or questioning their methods. Information on ratio analysis was gotten from different sources, which includes:- textbooks, Journals, Lecture Notes and other materials that was relevant for this research work.
POPULATION AND DETERMINATION OF SAMPLE SIZE
The staffs in the auditing and accounting department of First Bank of Nigeria Plc are the target populations for this study. This sample consists of a few department of First Bank of Nigeria Plc. the bank has a staff population of 13 in its internal audit department and 20 staffs in its accounting department. This gives a total of 33 officials
I will have to use the Yaro Yamene formula to get he sample size for this project.
CHAPTER FOUR
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
This chapter deals with presentation analysis and interpretation of data collected in the course of the study. This portion of the study is divided into two parts namely;
- Presentation and Analysis of Data
- Testing of Hypothesis
PRESENTATION AND ANALYSIS OF DATA
Question one: Does audit assessment process exist when an unqualified opinion is issues in a material misstatement?
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
SUMMARY OF FINDINGS
The consideration of audit risk and materiality when planning and performing an audit of financial statements in accordance with generally accepted auditing standards. Audit risk and materiality affect the application of generally accepted auditing standards, especially the standards of field work and reporting, and are reflected in the auditor’s standard report. Audit risk and materiality, among other matters, need to be considered together in determining the nature, timing, and extent of auditing procedures and in evaluating the results of those procedures. The existence of audit risk is recognized in the description of the responsibilities and functions of the independent auditor that states, “Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.” Audit risk is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. As amended, effective for audits of financial statements for periods ending on or after December 15, 1997, by Statement on Auditing Standards No. 82.
The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for fair presentation of financial statements in conformity with generally accepted accounting principles, while other matters are not important. The representation in the auditor’s standard report regarding fair presentation, in all material respects, in conformity with generally accepted accounting principles indicates the auditor’s belief that the financial statements taken as a whole are not materially misstated.
The researcher found out that that Audit risk and materiality has no significant role on the auditor’s responsibilities and also that that Audit risk and materiality has no impact on Auditors responsibility.
CONCLUSIONS
The auditor may require the client or management of the entity to correct the errors or misstatements, if any, which may be material or immaterial, identified. If the client or management has not corrected, any or all of such errors or misstatements, then the auditor should aggregate such errors or misstatements to assess the level of material effect on the financial information. Where the material misstatements are not corrected in the financial information, the auditor should make qualified report. Qualitative considerations also influence the auditor in reaching a conclusion as to whether the misstatements are material.
When the auditors tests an account balance or class of transactions by an analytical procedure, ordinarily it would not possible to specifically identify misstatements but an indication of whether misstatements might exist in the balance or class, and possibly its approximate magnitude, would be obtained. If the analytical procedure indicates that misstatements might exist, but not its approximate amount, the auditor ordinarily should employ other procedures to estimate the aggregate misstatement in the balance or class. When audit sampling is used by the auditor to test an account balance or class of transactions, the amount of known misstatements identified in sample to the items in the balance or class from which such sample was selected should be projected. Such projected misstatement, along with the results of other substantive tests, contributes to the auditor’s assessment of aggregate misstatement in the balance or class.
The consideration of the materiality of an item is the matter of professional judgement and experience of the auditor. The financial statements must contain all the material information to show true and fair picture. AAS-2, “Objective and Scope of the Audit of Financial Statements”, states that the auditor’s opinion helps determination of the true and fair view of the financial position and operating results of an enterprise. The user, however, should not assume that the auditor’s opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.
RECOMMENDATIONS
Based on the summary of findings and conclusions above, the following recommendations were made by the researcher:
When the auditor tests relevant assertions related to an account balance or a class of transactions by a substantive analytical procedure the auditor might not specifically identify misstatements but would obtain only an indication of whether misstatement might exist in the balance or class and possibly its approximate magnitude. If the substantive analytical procedure indicates that a misstatement might exist, but not its approximate amount, the auditor should request management to investigate and, if necessary, should expand his or her audit procedures to enable him or her to determine whether a misstatement exists in the account balance or class of transactions.
When an auditor uses audit sampling to test a relevant assertion for an account balance or a class of transactions, he or she should project the amount of known misstatements identified in the sample to the items in the balance or class from which the sample was selected. That projected misstatement, along with the results of other substantive procedures, contributes to the auditor’s assessment of likely misstatement in the balance or class.
The “closest reasonable estimate” may be a range of acceptable amounts or a precisely determined point estimate, if that is a better estimate than any other amount. In some cases, the auditor may use a method that produces a range of acceptable amounts to determine the reasonableness of amounts recorded.
The risk of material misstatement of the financial statements is generally greater when account balances and classes of transactions are subject to estimation rather than precise measurement because of the inherent subjectivity in estimating future events. Estimates, such as those for inventory obsolescence, uncollectible receivables, and warranty obligations, are subject not only to the unpredictability of future events, but also to misstatements that may arise from using inadequate or inappropriate data or misapplying appropriate data. Because no one accounting estimate can be considered accurate with certainty, the auditor may determine that a difference between an estimated amount best supported by the audit evidence and the estimated amount included in the financial statements may not be significant, and such difference would not be considered to be a likely misstatement. However, if the auditor believes the estimated amount included in the financial statements is unreasonable, he or she should treat the difference between that estimate and the closest reasonable estimate as a likely misstatement.
The auditor should also consider whether the difference between estimates best supported by the audit evidence and the estimates included in the financial statements, which are individually reasonable, indicate a possible bias on the part of the entity’s management.
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