Module: Audit and Assurance
Seminar 2 – Audit Evaluation & Planning/Risk/Materiality
Question 1
You are the newly appointed head of internal audit at ABC Plc. The external auditors
are about to commence the year end audit and you have been asked by the audit
committee to fully co-operate with the external auditors with a view to ensuring that
the audit runs smoothly.
REQUIRED
a. Explain in your own words, your understanding of materiality (2 marks)
An item is deemed material if it is significant enough to distort the view of the
financial statement because it has been omitted, misstated or hasn’t been
disclosed. For example, materiality level can be set at 4% of the profit before
tax.
You cannot define materiality without using these three words: non-disclosure
misstatement and omission.
b. Why are audit risk and materiality closely connected? (3 marks)
Materiality and risk are closely connected because the risk allows an auditor to
determine the materiality limit they can accept. If a company has a low risk, then
the auditor can allow a higher materiality level. But if a company has a higher
risk, then they will have a lower materiality level.
c. Explain using suitable and relevant examples how and why the auditor uses
performance materiality during the audit (5 marks)
First define performance materiality
State that it is lower than the standard set on materiality and then state why it
is that way.
Example: you set a performance materiality for the debtors. Debtors have a
balance of £22 million, and you set a performance materiality of £1 million
because you want to look at debtors’ balances above £1 million.
d. Why is materiality important at both the planning and review stages of the audit?
(10 marks)
At the planning stage, you are coming off from your risk assessment. You are
going to base your materiality level based on the result of your risk
assessment which you will apply going forward.
Seminar 2 – Audit Evaluation & Planning/Risk/Materiality
Question 1
You are the newly appointed head of internal audit at ABC Plc. The external auditors
are about to commence the year end audit and you have been asked by the audit
committee to fully co-operate with the external auditors with a view to ensuring that
the audit runs smoothly.
REQUIRED
a. Explain in your own words, your understanding of materiality (2 marks)
An item is deemed material if it is significant enough to distort the view of the
financial statement because it has been omitted, misstated or hasn’t been
disclosed. For example, materiality level can be set at 4% of the profit before
tax.
You cannot define materiality without using these three words: non-disclosure
misstatement and omission.
b. Why are audit risk and materiality closely connected? (3 marks)
Materiality and risk are closely connected because the risk allows an auditor to
determine the materiality limit they can accept. If a company has a low risk, then
the auditor can allow a higher materiality level. But if a company has a higher
risk, then they will have a lower materiality level.
c. Explain using suitable and relevant examples how and why the auditor uses
performance materiality during the audit (5 marks)
First define performance materiality
State that it is lower than the standard set on materiality and then state why it
is that way.
Example: you set a performance materiality for the debtors. Debtors have a
balance of £22 million, and you set a performance materiality of £1 million
because you want to look at debtors’ balances above £1 million.
d. Why is materiality important at both the planning and review stages of the audit?
(10 marks)
At the planning stage, you are coming off from your risk assessment. You are
going to base your materiality level based on the result of your risk
assessment which you will apply going forward.
