ABSTRACT
The aim of this study is
to find out audit risk and materiality: it’s impact on auditor’s
responsibilities. This work was divided into five parts. The first chapter is the
introductory part of the research work, which includes background of the study,
statement of problems, research question etc extensive literatures was reviewed
this means other recognized authors view or ideas on the subject matter. Data
for this research work was sourced through primary and secondary sources of
data collection. The presentation and analysis of data were dealt with in this
research work. Simple random and
stratified sampling is to be used to draw the sample size of the study.
Hypotheses was formulated and tested. Questionnaires and oral interview have to
be used as the main instrument of data collection. Based on the findings,
conclusion was drawn and recommendations was also made in the last part of the
work.
TABLE OF CONTENT
Title
page . . . . . . . . . . i
Certification
page . . . . . . . . ii
Approval
page . . . . . . . . . iii
Dedication . . . . . . . . . iv
Acknowledgement . . . . . . . . v
Abstract . . . . . . . . . . vi
Table
of contents . . . . . . . . viii
CHAPTER ONE
Introduction
1.1
Background of the study . . . . . 1
1.2
Statement of the Problem . . . . . 3
1.3
Objective of the study . . . . . . 4
1.4
Research questions . . . . . . 5
1.5
Hypothesis . . . . . . . . 5
1.6
Significant of the study . . . . . 6
1.7
Scope and limitation of the study . . . . 7
1.8
Definition of terms . . . . . . 8
References . . . . . . . . 10
CHAPTER TWO
Review
of related literature.
2.1
Concept of Materiality . . . . . . 11
2.1.1
Audit objective and materiality . . . 15
2.1.2
Matters influencing materiality . . . . 16
2.2
Concept of audit risks . . . . . . 17
2.3
Audit risk and materiality . . . . . 19
2.3.1
During audit function . . . . . 20
2.3.2
Materiality and reporting . . . . . 21
2.3.3
Extending the audit procedures . . . 22
2.3.4
Determining materiality . . . . . 23
2.4
Materiality in the context of an audit . . . 24
2.5
Nature and causes of misstatements . . . 26
2.6
Considerations at the financial statement
level . 31
2.7
Considerations at the individual account
balance, class of transactions or disclosure level . . . . 35
2.8
Determining materiality for financial
statements taken as a whole when planning the audit . . . . 45
2.9
Materiality for particular items of lesser
amount than the materiality level determined for the financial statements taken
as a whole . . . . . . . 50
2.10 Tolerable
misstatement . . . . . 52
References . . . . . . . . 54
CHAPTER THREE
Research
design and methodology.
3.1 Research design . . . . . . . 56
3.2 Description of Respondents . . . . . 56
3.3 Sources of data . . . . . . . 56
3.4 Population and determination of sample size . . 58
3.5 Method of investigation . . . . . . 61
References . . . . . . . . 63
CHAPTER FOUR
Presentation,
analysis and interpretation of data.
4.1 Presentation
and analyses of data . . . . 64
4.2 Testing of hypothesis . . . . . . 72
CHAPTER FIVE
Summary
of findings, conclusions and recommendations.
5.1 Summary of findings . . . . . . 79
5.2 Conclusions . . . . . . . . 81
5.3 Recommendations . . . . . . . 83
Bibliography
. . . . . . . . 87
Appendix
I . . . . . . . . 89
Appendix
II . . . . . . . . 90
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Auditing
may be simply defined as the independent examination of the financial statement
of an organization with a view to expressing an opinion as to whether these statements
give a true and fair view and comply with the relevant statues. This opinion
must be expressed in form report. The person who caries such examination is
called the Auditor.
Audit Risk according to Oxford Accounting
Dictionary defines Audit as a risk that an Auditor fails to qualify the audit
report when the financial statements are materially misleading, i.e. do not
give a true and fair view.
According to AICPA, section 312 and 35D,
professional standards recognize that there is some uncertified when an auditor
provides an opinion on whether an
entity’s financial statements are fairly presented, this uncertainty is
known as Audit risk. Audit risk is a function of three risks, they inherent
risk, control risk and detection risk. These should be considered by auditors
when planning and evaluating the results of an audit. No authoritative guidance
is provided on factors that should be considered when establishing materiality
for planning or evaluating purposes. During the planning phase of an auditor
establish materiality to determine the nature timing and extent of auditors
establishes a quantitative amount of materiality during the planning phase.
This quantitative amount is known as “planning materialityâ€.
Planning materiality is allocated to
classes of transactions or accounts because auditor normally group related
transact classes and account together to design and execute and audit strategy
for each of these groupings (auditing cycle approach)
The auditors responsibility when
conducting an audit is to provide reasonable assurance that the financial statements
are fairly presented in all material respects. All section 312 of the AICPA
professional standards notes that financial statements are materiality
misstated when they contain misstatement whose effect, individually or in the
aggregate results in financial statements that are not fairly presented
faithfully.
Materiality assessments are a matter of
professional judgment requiring auditors to consider the needs of individual
financial statement users.
1.2 STATEMENT OF THE PROBLEM
The basic problem is that there is some
uncertainty when an auditor provides an opinion on whether an entity’s
financial statements are fairly presented and the auditor’s responsibilities
when conducting an audit in order to provide reasonable assurance that the
financial statement are fairly presented in all material respects.
Other problems observed are:
1) How
planning and evaluating the results of an audit can be considered by the
auditors.
2) Factors
which an auditor can consider to allocate planning materiality
3) Arising
of materiality dependent on the size and nature of an item and the particular
circumstance
4) Ways
by which an auditor can follow audit risk assessment process to reduce the risk
of an unqualified opinion.
1.3 OBJECTIVE OF THE STUDY
The
main purpose of this research work is:
a. To
ascertain how materiality should be considered by an auditor when planning and
evaluating the results of an audit
b. How
an auditor can examine audit risk assessment process to limit it to an
appropriate level, the risk that an unqualified opinion will be issues when an
material misstatement exist.
c.
To verify the factors which an auditor may
consider to allocate planning materiality
d. To
identify how materiality arises depend on the size and nature of an item(s) and
the particular circumstance.
1.4 RESEARCH QUESTIONS
1. How
does an auditor compare materiality when planning and evaluating the result of
a audit?
2. Does
an audit risk assessment process exist when an unqualified opinion is issued in
a material misstatement?
3. What
are the consequences which an auditor may consider to allocate planning materiality?
4. How
does materiality arises on the size and nature of an item(s) and the particular
circumstance.
1.5 RESEARCH HYPOTHESIS
In
order to find answer to the questions raised in the research work, there is
need to formulate hypothesis on these problems
The
hypothesis are:
Ho:
Audit risk and materiality have significant role on the auditors
responsibilities
H1:
Audit risk and materiality has significant role on the auditor
responsibilities.
1.6 SIGNIFICANCE OF THE STUDY
Ø The
importance of the study is that it will highlight the consequences of audit
risk and materiality and how it affects and auditors in their functions or
roles
Ø In
this particular circumstance, auditor needs to consider three risks to ensure
that the overall risk of inappropriately issuing an unqualified opinion is
limited to an appropriate level. (Audit risk = Inherent Risk x control of risk
x detection risk).
Ø This
study would serve as an information back for future research in the area of
auditing.
Ø The
outcome of this study, would enhance the ability of the student offering
courses in Auditing to understand the subject property.
1.7 THE SCOPE AND LIMITATION OF THE STUDY
This
study is aimed at identifying the impact of and it risk and materiality on
auditor’s responsibilities. The research work was however, hamperedly the
following unavoidable constraints
1. Time: The
battle of carrying out this research along with the semester academic work was
enormous and tedious. The researcher could only manage any available time at
her disposal that would not disturb her own academic works.
2. Resource constraint:
The financial need of the research work is also enormous. The fact the
researcher is prone to only a paltry fixed a salary at the end of every month
were daily bread, is met has actually limited the research work because of the
cost of data collection.
3. Respondents:
The information used was based on that, provided by the respondents that are
seen as actual participants in the keeping and disbursement of public funds.
4. Location Constraint:
The research was based on information provided by civil servants serving in
Enugu State, even though the research work was a survey of the center Nigeria
situation however, there are some constraints that militate against the success
of the study
Below are the limitations
1. Some
setback occurs because of limited time constraints and the researcher were
financial handicap to carryout the work.
2. The
researcher is also limited by the unwillingness of certain workers to give out
necessary information required from them.
1.8 DEFINITION OF TERM
Auditing: This
is the independent examination of books of account and expression of opinion,
on financial statement of an enter prices by an appointed auditor in pursuance
of that appointment and compliance with relevant statutory obligation.
Audit Risk: This
is the risk that an auditor fails to qualify the audit report when the
financial statements are materiality misleading.
Materiality: The
extent to which an item of accounting information is material. Information is
considered material if it’s omission from or misstatement in a financial
statement could influence the decision making of its users.
Inherent Risk: This
is the likelihood of misstatement occurring in the absence of controls
Control Risk: This
is the risk that misstatement may not be prevented or detected on a timely basis
by the internal control system.
Detected Risk: This
is the risk that auditor’s substantive tests will not defect a misstatement
that exists on an account balance or class of transactions.
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