Auditing and Ethical Practices

Running head: AUDITING AND ETHICAL PRACTICES
Auditing and ethical practices
Name of the student
Name of the university
Student ID
Author note

1AUDITING AND ETHICAL PRACTICES
Table of Contents
Section 1..........................................................................................................................................2
Level of materiality......................................................................................................................2
Items those can be considered as significant for the purpose of audit.........................................4
Section 2..........................................................................................................................................5
Section 3........................................................................................................................................11
Reviewing statement of cash flows...........................................................................................11
Reviewing audit report..............................................................................................................11
Reference.......................................................................................................................................13

2AUDITING AND ETHICAL PRACTICES
Section 1
Level of materiality
One of the major concepts of audit is audit materiality that is the misstatement in the
financial statement taken place due to intentional error. Main objective of auditing is to express
opinion on the financial statement of the entity based on the presented financial information. The
auditor express the opinion regarding whether the information presented is not involved with any
material misstatement (Lai, Melloni & Stacchezzini, 2017). AUS 202 stated that the auditor shall
state in the auditor’s report that whether the report is prepared in accordance with the required
framework and all the material aspects have been taken care of (Auasb.gov.au, 2019). However,
various other factors those are taken into consideration while materiality is established are
reliability of the information those are provided by the entity’s management, accountant and
internal auditors, any significant changes taken place as compared to the previous year and other
qualitative and quantitative factors. There is an inverse relationship among the risk and
materiality level. If the level of materiality is high the audit risks level is low whereas the risk
level is high when the materiality level is low (Byrnes et al., 2015).
Planning materiality is the preliminary estimate made by the auditors in the audit
planning stage for financial statement items amounts. Level of planning materiality is the highest
amount by which it is believed by the auditors that the statements are likely to be misstated by
known as well as unknown frauds. In the preliminary stage the materiality impact of the item is
assessed individually and then in aggregate. Some of the bases are there those can be taken into
consideration while computing the materiality (Arens et al., 2016). These include net profit,

3AUDITING AND ETHICAL PRACTICES
gross revenue, shareholder’s equity and total assets. Higher and lower level for the mentioned
bases on which materiality is to computed are as follows –
Basis High level Low level
Net profit 5% 10%
Total revenue 0.5% 1%
Shareholder’s equity 2% 5%
Total assets 1% 2%
Materiality is generally established at the highest amount among all those are considered
as the bases. However, the tolerable level of misstatement varies between 20% and 80%. The
final level is determined based on the items, judgments, assumptions and estimates used by the
management for reporting the items in the financial statements. In case of Rio Tinto the level of
tolerable misstatement can be 40% of the materiality (William, Glover & Prawitt, 2016).
Rational behind choosing the materiality level
Materiality is the matter of professional judgments and the above mentioned items are
most significant items and are major items in the income statement and balance sheet. Hence,
these items can be taken as the bases for computing materiality. The level of materiality is
selected for Rio Tinto based on the fact that high amount involved in case of the items reported
in the balance sheet and income statement. Further, some of the items were there those required
the management’s judgmental approach and estimates (Eilifsen & Messier, 2014).
Quantitative estimate