Page 82 - CA Inter Audit PARAM

CA Ravi Taori
While conducting the audit of Zeena Limited, CA E is trying to obtain understanding of different
components of internal controls of the company. Such an understanding is necessary and is required to be
documented in accordance with Standards on Auditing. In this context, how he shall obtain understanding
of the risk assessment process of the company and how is this understanding important for the auditor?
Answer The assessment of risks is based on audit procedures to obtain information necessary for that purpose and
evidence obtained throughout the audit. The assessment of risks is a matter of professional judgment, rather
than a matter capable of precise measurement.

Audit risk is a technical term related to the process of auditing; it does not refer to the auditor’s business risks
such as loss from litigation, adverse publicity, or other events arising in connection with the audit of financial
statements. For the purpose of the Standards on Auditing, audit risk does not include the risk that the auditor
might express an opinion that the financial statements are materially misstated when they are not. This risk
is ordinarily insignificant.

In the given case, CA K is of the view that materiality and audit risk are only considered at planning stage of
an audit. The concept of materiality is applied by the auditor both in planning and performing the audit, and
in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any,
on the financial statements and in forming the opinion in the auditor’s report. Thus, the view of CA K is not
correct.

QNO Revision of Materiality Old Course – (N19M)
320.07 Bhaskar CNO SA320.120
Materiality for the financial statements as a whole may need to be revised as a result of a change in

circumstances that occurred during the audit. Explain with the help of example.
Answer ➢ Revision in Materiality level as the Audit Progresses:
Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels
for particular classes of transactions, account balances or disclosures) may need to be revised as a
result of
A change in circumstances that occurred during the audit (for example, a decision to dispose
of a major part of the entity’s business), (Example-Recession v/s boom)
New information, or (New Disclosure)
A change in the auditor’s understanding of the entity and its operations as a result of
performing further audit procedures. (Increase in assessed Risk)
• Example
o If during the audit it appears as though actual financial results are likely to be
substantially different from the anticipated period end financial results that were
used initially to determine materiality for the financial statements as a whole, the
auditor revises that materiality.
o Effect of Revision
If the auditor concludes that a lower materiality for the financial statements as a
whole (and, if applicable, materiality level or levels for particular classes of
transactions, account balances or disclosures) than that initially determined is
appropriate, the auditor shall determine
- whether it is necessary to revise performance materiality, and
- whether the nature, timing and extent of the further audit procedures
remain appropriate.

QNO— Documentation of Materiality New Course – (SM25)
320.10 Bhaskar CNO - SA320.140
Is materiality required to be documented by the auditor? What factors have to be considered this
regard?
Answer The audit documentation shall include the following amounts and the factors considered in their
determination:
• Materiality for the financial statements as a whole.

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