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• W44589199 abstract "Here's one method of allocating tolerable misstatement. Audit engagements can be viewed as a process of identifying, evaluating and ranking risk. Although decisions on risk ultimately are a function of audit judgment, CPAs can use various techniques to facilitate the process. This article illustrates one such technique: A detailed model for allocating tolerable misstatement is presented and other applications are suggested. THE DELPHI TECHNIQUE Project Delphi was a U.S. Air Force study conducted in the early 1950s by the Rand Corporation, a California think tank. It lead to the development of an analytical approach to problem solving based on the conclusions of a small group of three to seven individuals (a Delphi team) with specialized knowledge of a particular topic. A similar - and considerably more expensive - method, systems, also has emerged. Expert systems use a computerized hierarchy of rules elicited from individuals with particular knowledge of a field. This article illustrates a versatile Delphi ranking technique that costs little in money and time when compared to some of the auditing expert systems that recently have been developed. PRELIMINARY MATERIALITY ALLOCATION Audit risk is the risk that auditors may fail to appropriately modify an opinion because of a material financial statement misstatement. Some degree of audit risk will always exist because of inherent limits of the audit process. Statement on Auditing Standards no. 47, Audit Risk and Materiality in Conducting an Audit, suggests auditors should consider materiality in planning an audit. One common method of doing so is establishing a preliminary estimate of materiality. Such estimates constitute the aggregate dollar amount the financial statements could be misstated and still be fairly presented. Once established, this materiality estimate usually is distributed among various classes of transactions or financial statement elements as tolerable misstatement - the amount each of the individual financial statement elements can differ from their true amount without affecting the fair presentation of the financial statements taken as a whole. Although various approaches to allocating tolerable misstatement may be employed, the example shown below assumes a straightforward distribution among financial statement elements. On first consideration, it might appear appropriate to simply allocate aggregate preliminary materiality in proportion to the balances of the various financial statement elements. This would be an acceptable approach if * The nature of the various financial statement elements were the same. * The difficulty of attaining the necessary level of assurance as to the validity of the various assertions contained in each financial statement element were equivalent. * There were no restrictions on audit strategy or resources. In reality, however, some financial statement elements, such as land, may be significant in amount yet the minimal risk of misstatement and the easy availability of evidence means few audit resources are needed to reduce the risk of undetected misstatement to an acceptably low level. A different situation exists for other elements, such as inventory, for which the misstatement risk is more significant and audit evidence is more difficult or costly to obtain. Allocating a disproportionate amount of tolerable misstatement to financial statement elements such as inventory increases audit efficiency by reducing the audit resources needed to achieve the desired level of audit risk. Although the concept may be clear, the actual allocation of the aggregate preliminary materiality estimate to the tolerable misstatement of individual financial statement elements is complex. A number of factors - classified overall as inherent risk, control risk and detection risk - must be considered. Of course, these risks vary among different industries, clients, audit periods and financial statement assertions. …" @default.
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• W44589199 title "Comparison Risk Ranking Applications: Here's One Method of Allocating Tolerable Misstatement" @default.
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