Auditing and Assurance Standards in Australia

Running head: AUDITING AND ASSURANCE STANDARDS IN AUSTRALIA
AUDITING AND ASSURANCE STANDARDS IN AUSTRALIA
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1AUDITING AND ASSURANCE STANDARDS IN AUSTRALIA
Solution to answer no. 1
The process of risk assessment involves analytical procedures because it allows the
auditor to be acquainted with the situations relating to the organization, which he was
unacquainted of (Auditing Standard ASA 315 2015). The analytical procedures are applied
by the auditor because it will assist in the process of identifying any material misstatement
existent, which may form the basis of his planning and application of his response in the risk
assessment process. The analytical procedures performed by the auditor in the risk
assessment process includes both financial as well as non-financial information. One such
example could be the correlation among the purchase and volume of purchase or storage
space to store such inventory. The analytical procedures also helps the auditor in shortlisting
those situations, presence of uncommon transactions, sudden change in ratios, amounts or
business trends that might require his attention which could be of material help in the process
of audit. The situations identified and relevant data derived through the application of the
analytical procedures is of immense importance to the auditor in the process of audit as it
points out material misstatement especially relating to fraud. However, it should be
remembered that, the analytical procedures exhibit results at a high-level which covers a
much broader aspect of the organization relating to material misstatement (Auditing Standard
ASA 315 2015). So, the data collected in the process of the risk assessment should be
collaborated by the auditor along with the results to derive an effective conclusion relating to
the misstatements which may be considered material, especially fraud.
Solution to answer no. 2
Professional skepticism can be defined as the outlook of an auditor which includes
being vigilant in the process of audit, have a questioning mind to identify all possible errors
and fraud that might cause material misstatement. It is that quality of the auditor that enables

2AUDITING AND ASSURANCE STANDARDS IN AUSTRALIA
him to carefully analyze all audit evidence to detect any deviation or existence of
misstatement and prepare his report effectively and ethically. Professional skepticism can
also be referred as that quality of the auditor which helps him to gather data on such matters
that puts a question on the authenticity of the documents and information provided to him by
the management and also on the answers obtained through his inquiries.
Professional skepticism is very important in the process of the audit as it enables the
auditor to diminish the possibility of missing out uncommon situations, generalizing the
inferences drawn from the analysis of the results and possibility of using unsuitable
assumptions in carrying out the analytical procedures and assessing the results derived
through the application of such procedure (Exploratory Factor Analysis on Hurtt’s
Professional Skepticism Scale: A Malaysian Perspective, 2013). Professional skepticism in
risk assessment mainly outlines the questioning mind of the auditor in obtaining responses to
enquiries made to the management and others entrusted in the process of administration.
Majority of the data that an auditor requires for carrying out the process of audit are either
provided by the management or by the persons who were entrusted with the responsibility of
preparation of financial report. Along with the management, the auditor may obtain
information from the Internal Audit Function, if any, and other members of the organization
like the employees. Enquiries made to the management always helps the auditor to
comprehend the background within the organization’s administration where the financial
statements are made (Auditing Standard ASA 315 2015). While the enquiries made to the
employees helps the auditor to understand how they record simple as well as transactions to
apprehend the existence and application of relevant accounting policies.

3AUDITING AND ASSURANCE STANDARDS IN AUSTRALIA
Solution to answer no. 3
Preliminary assessment of materiality helps the auditor to plan the audit and carry out
the audit testing. According ASA 320, when the auditor tries to identify material
misstatement in the transactions documented in relevant books of accounts, balances relating
to relevant accounts and finally on the disclosures of the financial statements, the materiality
and the audit risk are both taken into account (Auditing Standard ASA 320 2015). The
auditor considers the concept of materiality in both planning as well as performance of the
audit. The auditor takes the materiality into consideration in planning an audit by making
relevant judgment using his professional competence about the misstatements which he
considers material. The judgments made by the auditor helps the auditor in ascertaining the
extent, nature and timing of the procedures for the ascertainment of risk, understanding the
risk relating to material misstatement. On the other hand, materiality related to audit
performance signifies the amounts which the auditor determines at a lesser amount than the
materiality level determined relating to the transactions recorded in the books, balances of
relevant accounts and finally on the disclosures of the financial statements (Auditing
Standard ASA 320 2015). There are certain benchmarks are used to determine the materiality
where the auditor uses his professional judgment in applying a percentage to a benchmark
and the factors affecting the choice of benchmark are as follows:
 The elements that appears in the financial reports like revenue, equity, assets and
many more.
 The items like profit, revenue and assets that attracts the attention of the financial
decision makers like the stakeholders.
 Life cycle of the organization, its nature, economic atmosphere and its operational
industry, ownership structure, sources of finance and many more.
The overall planning materiality can be calculated as follows: