Chapter 8 Con .

Audit planning and

analytical procedures.

1-1
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 4- Perform preliminary analytical
procedures.

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 Perform preliminary analytical
procedures
auditors are required to perform preliminary
analytical procedures as part of risk assessment.

Key financial ratios, along with industry standards,

are presented in Table 8-1.
Common-size financial statements are also often used
for one or more years for comparison as a
preliminary analytical procedure.

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Dr . Mohamed Mousa 8-4
 5- Apply the concept of materiality
to the audit.

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 Materiality

The fourth step in audit planning is to make a preliminary

judgment about materiality for the audit.

Auditing standards define materiality as the magnitude of

misstatements that individually, or when aggregated with
other misstatements, could reasonably be expected to
influence the economic decision of users.

There are five steps to applying materiality as noted in The

next Figure. The first two are part of the planning process.

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Dr . Mohamed Mousa 8-7
 6- Make a preliminary judgment about what
amounts to consider material.

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 Materiality for financial statements
as a whole

Step 1 in Figure 8-5 is to set materiality for the

financial statements as a whole as part of the
planning process.

Factors Affecting Preliminary Materiality Judgment:

 Materiality is a relative rather than an absolute

concept.

 Benchmarks are needed for evaluating materiality.

 Qualitative factors also affect materiality.

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Dr . Mohamed Mousa 8-10
 7- Determine performance materiality during
audit planning.

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 Determine performance Materiality

Step 2 in Figure 8-5 is to determine performance

materiality, which can also be referred to as the allocation
of the preliminary judgment about materiality to
segments.
 PCAOB standards refer to performance materiality as
tolerable misstatement.
 Performance materiality for an account is often set at 50–75
percent of overall materiality.
 Auditors have three major difficulties when allocating
materiality to balance sheet accounts:
1. Auditors expect certain accounts to have more misstatements
than others.
2. Both overstatements and understatements must be considered.
3. Relative audit costs affect the allocation.
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 8- Use materiality to evaluate
audit findings.

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 Estimate misstatement and compare
with preliminary judgment
Auditors document all misstatements found for each audit
segment. These may be known misstatements or likely
misstatements.
Known misstatements are those that the auditor can determine
the amount of misstatement in the account.
There are two types of likely misstatements:
1. Differences between management’s and the auditor’s
judgment about estimates of account balances
2. Projections of misstatements based on the auditor’s tests of
a sample

The last three steps in applying materiality are illustrated in

The next Table.
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Dr . Mohamed Mousa 8-15