QS Study

Components of Preliminary Audit Strategy

Planning the audit includes establishing the in general audit policy for the engagement and developing an audit plan, which includes, in exacting, planned risk assessment procedures and planned responses to the risks of material misstatement.

Preliminary Judgment: The auditor makes preliminary judgments about materiality levels in planning the audit. This assessment often referred to as planning materiality, may ultimately differ from the materiality levels used at the conclusion of the audit in evaluating the audit findings. In planning an audit, the auditor should assess preliminary materiality at the two levels:

  1. Materiality at the Financial Statement Level.
  2. Materiality at the Account Balance Level.

They are discussed below.

Materiality at the Financial Statement Level: Financial statements are materiality misstated when they contain errors or irregularities whose effect, individually or in the aggregate, is important enough to prevent the statements from being presented fairly in accordance with accounting standards.

The financial statement materiality at the financial statement level enables auditors to determine which account balances to audit and how to evaluate the effects of misstatements in financial information as a whole.

Materiality at the Account Balance Level: Account balance materiality is the minimum misstatement that can exist in an account balance for it to be considered materiality misstated. Misstatement up to that level is known as tolerable misstatement. The concept of materiality at the account balance level should not be confused with the term material account balance.