Question

1. What is meant by materiality and how does it impact the audit planning process?

2. What are the pre-engagement activities of an audit? Why are they important?

Answer 1

Ans 1

In auditing, materiality means not just a quantified amount, but the effect that amount will have in various contexts. During the audit planning process the auditor decides what the level of materiality will be, taking into account the entirety of the financial statements to be audited.

Materiality relates to both the content of the financial statements and the level and type of testing to be done. The decision is based on judgements about the size, nature and particular circumstances of misstatements (or omissions) that could influence users of the financial reports.

Ans 2

Pre-engagement activities take place before the auditor accepts or declines an audit engagement. These activities are performed when the auditor has to decide whether to accept a new client or to continue with the relationship with an existing client.

some activities associated with pre-engagement activities

1. Perform appropriate procedures to address the quality control issues associated with the acceptance/continuance of the audit Engagement
2. Evaluate the audit teams compliance with relevant ethical requirements
3. Establish an understanding in writing of the terms of the engagement

These activities are important because auditor has to decide whether to accept a new client or to continue with the relationship with an existing client.