Assessing the Controls to Manage, Mitigate, or Share Risks - The auditor needs to understand the organization's strategies for dealing with identified risks and evaluate the controls in place for this purpose. Developing an Audit Program - The audit program identifies account balances with more than a minimal risk of misstatement and is designed to directly test the account balance. Executing the Audit Program - Direct tests of account balances and the auditor's reasoning processes are documented in the workpapers. Communicating the Audit Results - The auditor's report is designed to add credibility to the financial statements, and is communicated to stockholders, lenders, and other interested parties. Materiality and Audit Risk One of the two most important factors that affect the planning and conduct of an audit is the auditor's assessment of materiality for line items on a company's financial statements.
Materiality is meant to convey a sense of significance or importance of an item.
An audit should provide reasonable assurance that material errors or irregularities will be detected. Although essential to the audit process, the concept of materiality is elusive. An auditor must understand who the potential users are and the type of judgments made by those users when relying on financial statements Overall Materiality vs. Individual Account Materiality - A planning materiality must be developed as a basis for determining the amount of work to be performed if an audit is to detect material misstatements. Generally, planning materiality decisions relate to the financial statements taken as a whole with that amount then being allocated to individual account balances.