Question

Are there any ideas, biases, or assumptions implicit in the text? How does that affect the conclusions that you are able to draw?

The auditor uses planning materiality (or overall materiality) in determining whether the financial statements overall are materially correct. In planning the audit, auditors consider planning materiality in terms of the smallest aggregate level of misstatements that could be material to any one of the financial statements. After determining planning materiality, the auditor uses performance materiality to determine significant accounts and the audit procedures to perform for those accounts. Performance materiality might be calculated at 75% of planning materiality. For example, if planning materiality is set at $100,000, performance materiality would be $75,000. While the auditor might use 75% of planning materiality to set performance materiality, a range of 50% to 75% is typically used.

Identify  procedures an auditor might perform to obtain an understanding of a client’s business and the associated business risks??

Answer 1

Before accepting any audit engagement, it is very much essential for an auditor to have and thus to obtain a complete and thorough understanding of the business entity and its environment so as to provide a basis for identifying and assessing the risks of material misstatements in the financial statements.  The objective of the auditor is to identify and appropriately assess the risks of material misstatement and so the Auditors need an understanding of the client's business and industry because the nature of the business and industry affect business risk and the risk of material misstatements in the financial statements. Providing a basis for designing and implementing responses to the risks of material misstatement can be done only once the identification and assessment of risks of material misstatement are done properly.

Some major aspects of understanding the client's business and industry, along with potential sources of information that auditors commonly use for each of the five areas, are as follows:

1. Having knowledge of Industry and its External Environment by reading industry trade publications, regulatory compliance requirements.
2. Knowing Business Operations and Processes by having a visit to the premises of the plant and offices, inquire of management, etc.
3. Inquire about Management and Governance by or from corporate charter i.e. Memorandum of Association, Articles of Association and bylaws, read agenda and minutes of board of directors and shareholders meetings, etc.
4. Understanding Client Objectives and Strategies by discussing with management regarding their vision and objectives for the reliability of financial reporting, effectiveness, and efficiency of operations, and simultaneously compliance with laws and regulations; read contracts and other legal documents with business parties or other stakeholders, such as those for notes and bonds payable, stock options, and pension plans, etc.
5. Analyzing corporate performance from its financial statements, perform ratio analysis, and inquire of management about key performance indicators that management uses to measure progress toward its objectives and vision.

Thus, it can be said that for successful accomplishment of audit engagement of an auditor, the above-mentioned points is the key for a successful start of an audit engagement of an auditor.