AUDIT RISK AND MATERIALITY: IT’S IMPACT ON AUDITORS RESPONSIBILITIES.
ABSTRACT
The aim of this study is to find out audit risk and materiality: it’s impact on auditor’s responsibilities. This work was divided into five parts. The first chapter is the introductory part of the research work, which includes background of the study, statement of problems, research question etc extensive literatures was reviewed this means other recognized authors view or ideas on the subject matter. Data for this research work was sourced through primary and secondary sources of data collection. The presentation and analysis of data were dealt with in this research work. Simple random and stratified sampling is to be used to draw the sample size of the study. Hypotheses was formulated and tested. Questionnaires and oral interview have to be used as the main instrument of data collection. Based on the findings, conclusion was drawn and recommendations was also made in the last part of the work.
TABLE OF CONTENT
Title page. . . . . . . . . . i
Certification page . . . . . . . . ii
Approval page. . . . . . . . . iii
Dedication . . . . . . . . . iv
Acknowledgement . . . . . . . . v
Abstract . . . . . . . . . . vi
Table of contents . . . . . . . . viii
CHAPTER ONE
Introduction
1.1 Background of the study . . . . . 1
1.2 Statement of the Problem . . . . . 3
1.3 Objective of the study. . . . . . 4
1.4 Research questions . . . . . . 5
1.5 Hypothesis . . . . . . . . 5
1.6 Significant of the study . . . . . 6
1.7 Scope and limitation of the study . . . . 7
1.8 Definition of terms . . . . . . 8
References . . . . . . . . 10
CHAPTER TWO
Review of related literature.
2.1 Concept of Materiality. . . . . . 11
2.1.1 Audit objective and materiality . . . 15
2.1.2 Matters influencing materiality . . . . 16
2.2 Concept of audit risks. . . . . . 17
2.3 Audit risk and materiality . . . . . 19
2.3.1 During audit function . . . . . 20
2.3.2 Materiality and reporting. . . . . 21
2.3.3 Extending the audit procedures . . . 22
2.3.4 Determining materiality . . . . . 23
2.4 Materiality in the context of an audit. . . 24
2.5 Nature and causes of misstatements. . . 26
2.6 Considerations at the financial statement level . 31
2.7 Considerations at the individual account balance, class of transactions or disclosure level . . . . 35
2.8 Determining materiality for financial statements taken as a whole when planning the audit . . . . 45
2.9 Materiality for particular items of lesser amount than the materiality level determined for the financial statements taken as a whole . . . . . . . 50
2.10 Tolerable misstatement . . . . . 52
References . . . . . . . . 54
CHAPTER THREE
Research design and methodology.
3.1 Research design . . . . . . . 56
3.2 Description of Respondents . . . . . 56
3.3 Sources of data . . . . . . . 56
3.4 Population and determination of sample size. . 58
3.5 Method of investigation . . . . . . 61
References . . . . . . . . 63
CHAPTER FOUR
Presentation, analysis and interpretation of data.
4.1 Presentation and analyses of data . . . . 64
4.2 Testing of hypothesis . . . . . . 72
CHAPTER FIVE
Summary of findings, conclusions and recommendations.
5.1 Summary of findings . . . . . . 79
5.2 Conclusions . . . . . . . . 81
5.3 Recommendations . . . . . . . 83
Bibliography . . . . . . . . 87
Appendix I . . . . . . . . 89
Appendix II . . . . . . . . 90
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Auditing may be simply defined as the independent examination of the financial statement of an organization with a view to expressing an opinion as to whether these statements give a true and fair view and comply with the relevant statues. This opinion must be expressed in form report. The person who caries such examination is called the Auditor.
Audit Risk according to Oxford Accounting Dictionary defines Audit as a risk that an Auditor fails to qualify the audit report when the financial statements are materially misleading, i.e. do not give a true and fair view.
According to AICPA, section 312 and 35D, professional standards recognize that there is some uncertified when an auditor provides an opinion on whether an entity’s financial statements are fairly presented, this uncertainty is known as Audit risk. Audit risk is a function of three risks, they inherent risk, control risk and detection risk. These should be considered by auditors when planning and evaluating the results of an audit. No authoritative guidance is provided on factors that should be considered when establishing materiality for planning or evaluating purposes. During the planning phase of an auditor establish materiality to determine the nature timing and extent of auditors establishes a quantitative amount of materiality during the planning phase. This quantitative amount is known as “planning materiality”.
Planning materiality is allocated to classes of transactions or accounts because auditor normally group related transact classes and account together to design and execute and audit strategy for each of these groupings (auditing cycle approach)
The auditors responsibility when conducting an audit is to provide reasonable assurance that the financial statements are fairly presented in all material respects. All section 312 of the AICPA professional standards notes that financial statements are materiality misstated when they contain misstatement whose effect, individually or in the aggregate results in financial statements that are not fairly presented faithfully.
Materiality assessments are a matter of professional judgment requiring auditors to consider the needs of individual financial statement users.
1.2 STATEMENT OF THE PROBLEM
The basic problem is that there is some uncertainty when an auditor provides an opinion on whether an entity’s financial statements are fairly presented and the auditor’s responsibilities when conducting an audit in order to provide reasonable assurance that the financial statement are fairly presented in all material respects.
Other problems observed are:
1)How planning and evaluating the results of an audit can be considered by the auditors.
2)Factors which an auditor can consider to allocate planning materiality
3)Arising of materiality dependent on the size and nature of an item and the particular circumstance
4)Ways by which an auditor can follow audit risk assessment process to reduce the risk of an unqualified opinion.
1.3 OBJECTIVE OF THE STUDY
The main purpose of this research work is:
a. To ascertain how materiality should be considered by an auditor when planning and evaluating the results of an audit
b. How an auditor can examine audit risk assessment process to limit it to an appropriate level, the risk that an unqualified opinion will be issues when an material misstatement exist.
c. To verify the factors which an auditor may consider to allocate planning materiality
d. To identify how materiality arises depend on the size and nature of an item(s) and the particular circumstance.
1.4 RESEARCH QUESTIONS
1. How does an auditor compare materiality when planning and evaluating the result of a audit?
2. Does an audit risk assessment process exist when an unqualified opinion is issued in a material misstatement?
3. What are the consequences which an auditor may consider to allocate planning materiality?
4. How does materiality arises on the size and nature of an item(s) and the particular circumstance.
1.5 RESEARCH HYPOTHESIS
In order to find answer to the questions raised in the research work, there is need to formulate hypothesis on these problems
The hypothesis are:
Ho: Audit risk and materiality have significant role on the auditors responsibilities
H1: Audit risk and materiality has significant role on the auditor responsibilities.
1.6 SIGNIFICANCE OF THE STUDY
Ø The importance of the study is that it will highlight the consequences of audit risk and materiality and how it affects and auditors in their functions or roles
Ø In this particular circumstance, auditor needs to consider three risks to ensure that the overall risk of inappropriately issuing an unqualified opinion is limited to an appropriate level. (Audit risk = Inherent Risk x control of risk x detection risk).
Ø This study would serve as an information back for future research in the area of auditing.
Ø The outcome of this study, would enhance the ability of the student offering courses in Auditing to understand the subject property.
1.7 THE SCOPE AND LIMITATION OF THE STUDY
This study is aimed at identifying the impact of and it risk and materiality on auditor’s responsibilities. The research work was however, hamperedly the following unavoidable constraints
1. Time: The battle of carrying out this research along with the semester academic work was enormous and tedious. The researcher could only manage any available time at her disposal that would not disturb her own academic works.
2. Resource constraint: The financial need of the research work is also enormous. The fact the researcher is prone to only a paltry fixed a salary at the end of every month were daily bread, is met has actually limited the research work because of the cost of data collection.
3. Respondents: The information used was based on that, provided by the respondents that are seen as actual participants in the keeping and disbursement of public funds.
4. Location Constraint: The research was based on information provided by civil servants serving in Enugu State, even though the research work was a survey of the center Nigeria situation however, there are some constraints that militate against the success of the study
Below are the limitations
1. Some setback occurs because of limited time constraints and the researcher were financial handicap to carryout the work.
2. The researcher is also limited by the unwillingness of certain workers to give out necessary information required from them.
1.8 DEFINITION OF TERM
Auditing: This is the independent examination of books of account and expression of opinion, on financial statement of an enter prices by an appointed auditor in pursuance of that appointment and compliance with relevant statutory obligation.
Audit Risk: This is the risk that an auditor fails to qualify the audit report when the financial statements are materiality misleading.
Materiality: The extent to which an item of accounting information is material. Information is considered material if it’s omission from or misstatement in a financial statement could influence the decision making of its users.
Inherent Risk: This is the likelihood of misstatement occurring in the absence of controls
Control Risk: This is the risk that misstatement may not be prevented or detected on a timely basis by the internal control system.
Detected Risk: This is the risk that auditor’s substantive tests will not defect a misstatement that exists on an account balance or class of transactions.
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