Materiality is assigned on a company by company basis when the company is audited. In this paper the subject to explain will be why certain accounts have to be audited 100% and why is materiality allocated only to the accounts that are sampled. Also this paper will answer if any component of the audit risk is within the auditors control and how the three risks that make up audit risk inter-relate. Auditors make a decision on whether the information provided by the company should be used for the purpose of the audit or discarded as unimportant.
Award winning company Sweet Truths, the second largest confectionery business in the trade has hired Layton and Devine audit firm to perform and audit on the company. Layton and Devine will audit three accounts 100%; Cash, Credit lines, and Intangibles because these accounts are easily verifiable. Layton and Devine will sample three accounts; Inventory, Property, Plant and Equipment, and Accounts payables because these accounts have many more transactions and to audit thoroughly would be time consuming and not necessary.
The allocated planning materiality for these accounts is as follows; Inventory $148,523, Property, Plant and Equipment $2,845,819 and Accounts payables $1,037,992. Base of the estimated materiality will be the total assets and the base amount for materiality is $3,300 million. Detention risk is the component of audit risk within the control of the auditor through the capacity of the audit process.
The sampling for the balance sheet has been set to a moderate detention risk and is expected to contain a misstatement of zero dollars, a sample size of $1,502 and a sampling interval of $92,251. The three components of audit risks are Inherited risk, Control risks, and Detention risks. The components of audit risks are inter-related because the audit risks are integral in assisting the auditor in determining the extent of auditing measures for a transaction or account balance.
Auditors assigned to perform audits ensure that services are performed in accordance with regulations and that materiality is assigned accordingly. Accounts audited 100% and looked at transaction by transaction while sampled accounts need independent evidence to access if the actual value matches the estimated value.
Boynton, W. C. , & Johnson, R. N. (2006). Auditing and the Public Accounting Profession— Integrity of Financial Reporting. Hoboken, New Jersey: John Wiley & Sons, Inc..