Assessing Materiality and Risk Simulation

Team C Assessing Materiality and Risk Simulation

ACC/491

September 15, 2013

Team C Assessing Materiality and Risk Simulation

Complete the simulation and prepare a 350-word response to the following questions:

• Why do certain accounts have to be audited 100%? - Certain accounts, because of their nature and value to the company, are material in and by themselves, but may not contain material transactions, in these instances the transactions are sampled to make sure that in total, the auditor can rely on the account. Other accounts represent transactions that in and by themselves are material to the company; these transactions will be audited completely.

• Why is materiality allocated only to those accounts that are sampled? - According to FASB (2008) materiality is a pervasive concept relative to qualitative characteristics, especially when it relates to relevance and reliability (Materiality). Magnitude alone is not sufficient basis for materiality judgment without the surrounding circumstances and nature of the item (FASB, 2008, Materiality). When performing an audit, auditor selects accounts that will be 100% audited and accounts that will be sampled, just like in the Assessing Materiality and Risk simulation. Materiality is allocated only to the accounts that are sampled because those accounts are not audited 100%. Auditor performs test on accounts that are sampled to collect sufficient evidence in determining whether there are no material misstatements. Materiality is allocated to determine sample size necessary for the assurance required (Gist & Shastri, 2003, para. During the Audit).

• Is any component of audit risk within the control of the auditor? Explain. - Many of the components of audit

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