Professor, how will an external auditors' audit strategy change, when higher risk of material misstatement is detected, specifically with respect to the following:
i)performance materiality
ii)plans to test operating effectiveness of controls
iii) nature, timing and extent of substantive procedures
Ask the Tutor ACCA AA
increased risk of material misstatement
Consider the audit risk model on page 57 of the notes:
If RoMM (i.e. IR and CR) is increased, DR must be reduced (otherwise AR will be increased). See at the bottom of the page - DR is determined by "nature, timing and extent" of audit procedures.
Materiality (as a $ amount) is sometimes described as having an "inverse" relationship with risk - if RoMM is high, DR is reduced by doing more audit work - so $ materiality is also reduced. Suppose materiality is $100,000 - all transactions and balances > $100,000 will be tested (and of course some lesser amounts) - if you reduce materiality to $80,000, you will also be testing all transactions and balances in the range $80,000 - $100,000.
RoMM cannot be higher than IR - CR is either 100% (if there will be no TOCs) or assessed as less than 100% if TOCs provide evidence that controls are operating effectively.
Please see the overview at the beginning of Chapter 8 - there is a narrative on the following page that explains how the strategy will change if controls are not operating effectively.
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