[murano]

The next paragraph is from AU-C
In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material. These judgments provide abasis for A.determining the nature and extent of risk assessment procedures; B.identifying and assessing the risks of material misstatement; and C.determining the nature, timing, and extent of further audit pro-cedures.
It says materiality provides a basis for identifying and assessing the risks of material misstatement
My question : If materiality is an absolute number, then everything is fine. We can compare all the transactions and account balances to materiality and select those above the line to assess RMM. (Say materiality is 100k, cash balance is 200k, A/R balance is 50k, then we choose cash as an account that may contain material misstatement). This makes sense to me.
But in the definition of materiality, it seems that it is a difference rather than absolute number. Then how can we use this difference in risk assessment? We don’t even know the difference in those transactions and accounts when assessing the risk, then HOW CAN WE COMPARE THEM WITH MATERIALITY?
Really hope someone can help me. This is literally driving me crazy lol.

[Recked]

Not an auditor, but I think you would be more likely to look at the A/R account to look for transactions that exceed your materiality level.
Not so much just relying on the year end balance.

[murano]

@Recked
Thanks a lot for your help!

[terribletwenties]

Is there a risk? If yes, is the risk material?=aka is the worst case scenario above performance materiality or even trivial amount? Is the risk pervasive?= aka could the risk effect the financial statements from being fairly represented. When looking at materiality in risk assessment remember to analyze WCGW (what could go wrong) and how that effects the financial statements.

[murano]

Thanks @terribletwenties
So when you apply materiality in risk assessment, you have to estimate what could go wrong to compare it to performance materiality. On the other hand, when reponding to risk, sampling will provide you with more evidence to compare to performance materiality. Am I right?

[Author]

Replies