Assessing Materiality and Risk Simulation

Assessing Materiality and Risk Simulation

University of Phoenix

November 13, 2011

ACC/490

Dave Mancina

Assessing Materiality and Risk Simulation

Accounts need to be audited so that other people can rely on that information and make correct decisions for investment. It helps the company management to get ensured that company is running profitable and according company is following the correct Accounting standards and policies. It helps the management to ensure that their accounts depict the true and fair view. Auditing is done to protect the investors, shareholders, and banks to give reassurance that the information given to them by management is correct. Due to the audit limitations and constraints, i.e. timeframe, personnel resources, some of the accounts cannot be 100% audited. Because these accounts might still have a profound effect on the correctness of managerial assertions and investors decisions they will be sampled rather than 100% audited.

Materiality is allocated only to the accounts that are sampled because materiality is a relative concept. In other words, materiality is a function of the time, the situation, and the people involved. Normally only accounts that matter will be sampled for any type of checking, and thus materiality allocated only to those accounts that are sampled. Secondly, an auditor for the sake of thoroughness will allocate materiality to everything he samples. Just to be sure that no account is ignored or given less weightage and thus escapes his view.

Audit Risk has 3 components namely Inherent Risk, Control Risk and Detection Risk. Detection Risk is within the control of the auditor. This means that if the detection risk is high, the auditor is willing to accept a high detection risk, and will do less substantive testing as compared to a situation where the detection risk is lower. It is important to note that while detection risk can be modified at the auditor's discretion,...