Question 1

One difficulty that commonly arises in making materiality judgements is that the auditor's materiality judgements at the planning stage may differ from those at the evidence evaluation stage because the auditor may learn certain facts during the audit that cause a change in judgement.

Accepted Answer

During the audit process, auditors may uncover new information that impacts their understanding of the financial statements, leading to adjustments in their materiality judgments from the planning stage to the evidence evaluation stage.

Question 2

A third common problem is determining how to allocate materiality where there are many client locations.

Accepted Answer

Allocating materiality in an audit involves determining the maximum amount by which the financial statements can be misstated without affecting the decisions of reasonable users. When an audit involves multiple locations or components, determining how to allocate the overall materiality to each location or component can indeed be a common and complex problem, as it requires judgment and consideration of the risk and significance of each location to the financial statements as a whole.

Question 3

Different materiality levels may be established for different locations and the aggregate of the location materiality levels could equal or exceed overall planning materiality.

Accepted Answer

Different materiality levels can be established for various locations within an audit due to the differing nature, size, and risk of those locations. The aggregate of these location-specific materiality levels may indeed equal or exceed the overall planning materiality, reflecting a tailored approach to assessing materiality that accommodates the unique aspects of each location.

Question 4

An important consideration for auditors in judging the potential materiality of contingencies is the needs of investors and other users of the financial report and audit report.

Accepted Answer

Auditors must consider the needs of investors and other users of financial reports because materiality judgments can significantly affect the decisions made by these users. Contingencies can have material impacts on the financial statements, and understanding the information needs of users is crucial in assessing the significance of these impacts.

Question 5

The auditor is not required to make a judgement as to what the fair value of a security might be at year end and about contingencies - including their probability and potential dollar amount.

Accepted Answer

The auditor is required to evaluate the appropriateness of management's use of the going concern assumption, assess the risks related to financial statement items including fair values and contingencies, and consider whether management has adequately accounted for and disclosed these items in accordance with the applicable financial reporting framework. This includes evaluating the methods, assumptions, and data used by management in their estimations, which can involve fair values and contingencies.

Question 6

ASA 320 Materiality In Planning and Performing An Audit provides the professional accounting bodies with basic guidance on materiality judgements.

Accepted Answer

ASA 320 Materiality In Planning and Performing An Audit is a standard that guides auditors on how to apply materiality judgements during the planning and execution phases of an audit, ensuring that the audit is conducted efficiently and focuses on matters that are significant to the financial statements.

Question 7

The accumulation of all potential misstatements in a place where the audit team can assess the materiality of misstatements is often based on performance materiality.

Accepted Answer

Performance materiality is used by auditors to reduce the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. It acts as a threshold to evaluate the significance of individual misstatements and their potential impact when accumulated.

Question 8

Performance materiality is a materiality level where the auditor believes that the errors below that level would not, even when aggregated with all other misstatements, be material to the financial report.

Accepted Answer

Performance materiality is set by the auditor at less than the materiality level for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements.

Question 9

The auditor should have gathered systematic evidence that incorporates relevant information about the correctness of the account balance and should be able to defend the veracity of that estimate.

Accepted Answer

Auditors are required to gather sufficient, appropriate evidence to support their audit opinions, including evidence about the correctness of account balances, and must be able to justify their conclusions based on that evidence.

Question 10

Auditors need to consider the risk and take appropriate action relating to material misstatements of fact contained in the client's annual report, including in the Directors' Report.

Accepted Answer

Auditors are responsible for evaluating the risk of material misstatement in financial statements, including those caused by errors or fraud. This includes considering misstatements in all parts of the annual report, such as the Directors' Report, to ensure the overall financial information presented is free from material misstatement and provides a true and fair view.

Question 11

It is a mandate for all companies listed with the Australian Securities Exchange to maintain an internal audit function.

Accepted Answer

The Australian Securities Exchange (ASX) Corporate Governance Principles and Recommendations suggest that a listed entity should disclose if it has an internal audit function, how the function is structured, and what role it performs. However, it is not a mandate for all companies to maintain an internal audit function; it is a recommendation that depends on the size, complexity, and nature of the company's operations.

Question 12

ASA 610 encourages the external auditor to utilise the work of internal auditors and other objective parties within the organisation when performing the assessment of internal control over financial reporting.

Accepted Answer

ASA 610 acknowledges that the external auditor can use the work of internal auditors and other objective parties to obtain audit evidence, as long as the external auditor evaluates and concludes on the adequacy and effectiveness of the work for the purposes of the audit.

Question 13

According to the AASB 138 Intangible Assets, intangible assets that are not amortised will be tested for impairment at least annually by comparing the fair values of those assets with their recorded amounts.

Accepted Answer

AASB 138 requires that intangible assets with indefinite useful lives should not be amortised but must be tested for impairment at least annually by comparing their carrying amount to their recoverable amount, which may involve assessing fair values.

Question 14

Considering AASB 139 Financial Instruments: Recognition and Measurement, the cash position of the investee is one of the factors that indicate that an other-than-temporary impairment of a security's value has occurred.

Accepted Answer

The cash position of the investee can indicate financial difficulties, which may suggest an other-than-temporary impairment of a security's value under AASB 139.

Question 15

Areas where subjective judgements are made are almost always:

Accepted Answer

Areas where subjective judgments are made are almost always high risk and require significant auditor attention because they involve the auditor's opinion and interpretation, which can be influenced by factors such as bias or lack of experience.

Question 16

Recent history shows that many auditors lack skills in making:

Accepted Answer

Auditors often struggle with making professional judgments, which are crucial for assessing risks and making informed decisions during audits.

Question 17

The auditor may also be required to make a judgement as to what the fair value of a
Security might be at year end and about contingencies This includes their:

Accepted Answer

The auditor's judgement about contingencies involves assessing their probability and potential dollar amount, as this information is crucial for accurately reflecting the financial position and potential liabilities of the entity being audited.

Question 18

The Global Reporting Initiative, which issued the G3 Guidelines in 2006, is examining the issue of materiality as it applies to:

Accepted Answer

The Global Reporting Initiative (GRI) focuses on sustainability reporting, providing guidelines for organizations to report their economic, environmental, and social performance. The G3 Guidelines, issued in 2006, are part of these efforts, emphasizing the importance of reporting on sustainability issues that are material to an organization and its stakeholders.

Question 19

If management resists making the adjustment, then, by definition, it can be argued that it is:

Accepted Answer

If management resists making an adjustment, it suggests that the adjustment is significant or material to the financial statements, indicating its importance or potential impact on decision-making.

Question 20

Which of the following accounts would be subject to allowance for non-collectibility?

Accepted Answer

Finance receivables - net are subject to allowance for non-collectibility because they represent amounts due from customers that might not be collected in full, hence an allowance account is used to estimate and record these potential losses.

Quiz 17: Advanced Topics Concerning Complex Auditing Judgements