Audit Risk

Audit risk is a function of the risk of material misstatement and detection risk (ASA 200, ISA 200). Moroney, Campbell and Jane Hamilton (2016) claim that the relationship between risk of material and misstatement and detection risk is inverse. As mentioned inherent and control risk of GOL are high, therefore we would set detection risk as low to maintain a low audit risk.  By setting a low detection risk, reliance of detailed substantive procedures will be increased, which involves intensive testing of year-end account balances and transactions from throughout the year.

Comparing with the figure provided by Moroney, Campbell and Jane Hamilton (2016), the materiality would be set low because of high risk of material misstatement and low detection risk. GOL’ s annual reports show that company’s profits before tax in recent years (from 2012 - 2015) are negative, exception being 2016. So it follows that GOL made continuous losses before 2016 and profits varied significantly in FY2016. Thus, profit before tax will not be used as a base. Analyzing the notes of GOL’s financial statements, some accrual revenue accounts contained numbers generated through misleading practices (PCAOB, 2016). Hence, revenue cannot be selected as an appropriate base as well. By using professional judgement, total asset is the most adequate choice for base.

As a rule of thumb, when using total assets as a base, the materiality of any item between 0.5 and 1 per cent of total is a matter for professional judgement. Due to the low planning materiality level mentioned before, the percentage should be low but not the lowest. After professional judgement, 0.7% is acceptable and applicable. Amount of total assets is R$ 8,404,355,000, so the amount of materiality level is 0.7% * R$ 8,404,355,000 = R$ 588,304,850. Therefore, all items falling above R$588,304,850 will be deemed material.