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increased risk of material misstatement

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › increased risk of material misstatement

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by Kim Smith.
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  • July 15, 2021 at 12:36 pm #627838
    Jiya024
    Member
    • Topics: 168
    • Replies: 56
    • ☆☆☆

    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

    July 15, 2021 at 1:00 pm #627840
    Kim Smith
    Keymaster
    • Topics: 100
    • Replies: 6789
    • ☆☆☆☆☆

    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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