Page 81 - CA Inter Audit PARAM

CA Ravi Taori
statements as a whole could reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements include the following:
Whether law, regulations or the applicable financial reporting framework affect users’
expectations regarding the measurement or disclosure of certain items.
Example Related party transactions, and the remuneration of management and those charged
with governance.
The key disclosures in relation to the industry in which the entity operates.
Example Research and development costs for a pharmaceutical company.
Whether attention is focused on a particular aspect of the entity’s business that is separately
disclosed in the financial statements. Example A newly acquired business.

Relationship between Materiality and Old Course -- (P16M/M17M/ M22R)
QNO
320.05 Audit Risk
Bhaskar CNO SA320.100
Explain the Relationship between materiality and audit risk.
OR

While conducting the audit of Smart TV Ltd, engagement team of HTR& Co, has considered materiality and
audit risk throughout the audit. Discuss explaining the meaning of audit risk.
Answer Consider Materiality & Audit Risk in Audit Process
SA 320 on ‘Materiality in Planning and Performing an Audit’ requires that the auditor should
consider materiality and its relationship with audit risk when conducting an audit.
Inverse Relationship
There is an inverse relationship between Materiality and the degree of audit risk. Higher the
materiality level the lower the audit risk and vice-versa.
Materiality Depends on Circumstances
Materiality depends on the size and the nature of the items judged in the particular circumstances
of its misstatement.
Audit Risk should be within acceptable levels
The audit should be planned so that audit risk is kept at an acceptably low level. After the auditor
has assessed the inherent and control risks, he should consider the level of detection risk that he
is prepared to accept and, based upon his judgment, select appropriate substantive audit
procedures. If the auditor does not perform any substantive procedures, detection risk, that is,
the risk that the auditor will fail to detect a misstatement, will be high. The auditor’s assessment
of audit risk may change during the course of an audit according to the need and development
of the circumstances.

Author’s Note
It’s a traditional answer, concept of inverse relationship should be explained and apart from
that it should be explained that combination of materiality and audit risk is used at various
steps in audit, as explained below
Identifying and assessing the risks of material misstatement.
Determining the nature, timing and extent of further audit procedures; and
Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in
forming the opinion in the auditor’s report.

QNO-- Materiality & Audit Risk Application at Planning & Performance Phase New Course – (S24M)
320.05.50 Bhaskar CNO – SA320.100

"While planning the audit of Me Limited, CA M has planned nature, timing and extent of risk assessment
procedures to identify and assess risks of material misstatements. How risk should be assessed by the
auditor CA M? It is also well known that assessment of risks is a matter of professional judgment.

Which specific matters are not included in audit risk? Additionally, CA K, one of the team members of CA M,
is of the view that Materiality and Audit Risk are only considered at planning stage of an audit. Comment."
OR

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