Audit planning: Materiality and the risk of material misstatement?

Audit planning: Materiality and the risk of...

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If you are practising on a case that audit is required by the bank due to a new lending agreement; what would be the banks main interest in terms of planning materiality? What would be the benchmark? It is a private enterprise family owned business they do seasonal work approximately 20 weeks of the year.

ie: income before tax, total assets, total equity, gross revenue.

Also, should you consider performance materiality and which accounts would you consider?

Thank you

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By newport daz
25th Oct 2013 15:03

P7?

Please don't take this the wrong way, but this sounds just like an ACCA p7 (advanced audit) exam/course work question that I was presented with many times when doing the subject.  I know the text book answer to this if I was doing P7 but have never done a day's real audit in my life so don't know how different that is from a text book.

If this is a real life scenario I'll leave it to the real auditors to answer your question. Good luck with your answer.

 

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By shygirl
25th Oct 2013 15:22

Thanks P7..no this is my course work it is not a real case. i just have to submit an assignment. I don't know the answers and I don't have the text book to look for the answer. If you could give me an idea I would greatly appreciate it. I would say the bank would interest in profitability of the company but  the company created losses for the year after receiving the bank loan.so I am completely confused if anyone can help I'll be very happy. Bank wants the audit, how can I [***] materiality on losses  (???) Any brief or detail answer will help me a great deal. Thank you

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By User deleted
25th Oct 2013 15:26

Technically ...

... if the bank require an audit you need a letter of engagement with the bank setting out the scope of work!

I am assuming the bank just require "audited acconts". A standard audit is for the benefit of the member so the bank cannot rely on it, so all that is happening is that the members are not taking the audit exemption available to them but your audit should be planned in the knowledge a third party is seeking to rely on it and this will influence the risks that will be identified during the audit planning stage. If you cannot do this (identify the risks) then you should not accept the asignment as one of the criteria considered during the planning is whether you have the requisite skill and experience to perform the audit! 

Unfortunately banks are very keen to have an audit done despite being clueless about what an audit is!

I would advise finding one of the many firms that will solely do the audit, from the accounts you prepare, especially as from the scenario you state your independence my be threatened by your provision of other services to the client.  

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By User deleted
25th Oct 2013 15:27

Ah ...

... please state this in the opening question, not whilst I am wasting my time typing a response!

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paddle steamer
By DJKL
25th Oct 2013 18:11

It may be the angle here is what are the Bank's covenants within their  new lending agreement( are these outlined in the question)?

e.g.

Is there an LTV covenant,Interest Cover covenant,Total repayment cover covenant

Look at what they are secured over and how, 

e.g 

Fixed security,Floating charge etc

As an earlier poster has indicated, unless the bank are instructing the audit, it is not your role to perform it on the basis of their particular interests/requirements.  I do however recall performing one audit where the client asked us to report to their bank regarding their adherence to particular covenants, however that was not part of the audit as such it was in effect a further instruction from the client.

To tell you the truth  it is a very long time since I worked in audit, and I have forgotten exactly how I used to calculate materiality, however I do vaguely recall preparing some form of table of the key figures from the accounts,  (turnover, current assets, current liabilities, overheads etc) and then applying risk evaluated percentages to each to somehow arrive at an overall audit materiality level to be used. This was then used in calculating some of the sample sizes for the substantive and compliance audit tests and as a benchmark against unadjusted errors found in the course of the audit just before sign off.

Hopefully someone more involved with current auditing will be along to give you better advice.

DJKL

 

 

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Replying to Matrix:
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By shygirl
25th Oct 2013 20:44

Thanks to your response. No there is not an particular covenants in the question itself but is a family business and the shareholders have professional occupations outside of this family business. The business generated losses. The money borrowed from the bank intentionally used for fixing the rental properties and building a small playground to attract families with kids. 

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By andrew1211
28th Oct 2013 09:02

Whilst the covenant may say audited accounts they are more than likely to accept unaudited accounts where the company is not legally obliged to have an audit. Often the covenant request is a standard template that is thrown out with no thought.

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By User deleted
28th Oct 2013 10:18

I have an even better ...

... real life case - the covenant says the bank "may" require audited accounts!

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