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Introduction
Section 404 of Sarbanes-Oxley Act 2002 governs and requires companies management to take a complete responsibility about external and internal controls and affirm in writing which is reinstated by an Auditor’s Report . This provision is applicable to the companies that have a market capitalization of more than $ 75 million for fiscal year ending on or after June 15, 2004 whereas for smaller companies, the compliance of Section is required from the first fiscal year ending on or after June 15, 2005.
An auditor is a CPA professional who represents company’s shareholders, to audit accounting records, procedures and systems that are followed for both external and internal control. Importantly, Auditors have to be thoroughly professional and well versed with the laws of accounting principles (GAAP) and (SAS). Secondly a complacent and cordial environment with companies directors, staff, accountants and internal auditors is required to be maintained in order to verify, retrieve necessary information and practice accurate auditing procedures, until the authentication of final audit report.
Audit Assessment of Materiality
(a) Definition of materiality – Accounting and Auditing
Accounting Institute Seminars Inc. defines material (materiality) as “Information important enough to change an investor’s decision. Insignificant information has no effect on decisions, so there is no need to report it. Materiality includes the absolute value and relationship of an amount to other information”.
(b) Difference between qualitative and assessment of materiality
Qualitative is a relative term for identifying a quality or feature of a particular account or a material fact for the purpose of auditing. Pursuant to Section 312 some of the important qualitative factors that are considered by an Auditor are, potential risk on misstatement, a misstatement that results in indication of loss or income in financial statements and statutory requirements of compliance. These factors will influence an auditor to judge whether a misstatement is material (true or false) which in turn will have an adverse impact in financial statements. For e.g. illegal income that is not shown in financial statements would be materialized by an auditor as part of Balance sheet as Contingent Liability or as the case may be.
(c) Assessment of materiality in audit and its implications
SAS No. 107 provides for the audit risk and materiality while conducting an audit. A suitable planning, timing and assessment of risks has to made, in order to form a basis for audit evidence which is mandatory to be in conform with financial statements. All efforts must be made by an auditor to make available disclosure of information by management, accountants and public in order to prevent redundancy and ambiguity in audit.
Classification and Reliability of Audit Evidence
(a) Classification of documentation as internal or external evidence
The sources of internal and external documentary evidences include sales, purchase, bank statements, contracts, agreements etc.,
(b) Classification of documentation in terms of its reliability
Tax forms and returns are a high reliable source of evidence for auditors which provide certified details of company sales, income and profits. Internal audit report is a moderate source of reliable evidence subject to re-affirmation or verification by external auditors. Uncertified and unapproved documentation is a poor or low reliable evidence for considering material facts.
(c) Assertion of account balance to the affirmation of Auditor
SAS 31 calls for assertions to be made by auditors for classification of transactions. (e.g. confirmation sent to customer on accounts receivable or confirmation of cash balances ) The transactions have to be duly recorded in respective books of accounts in accordance with GAAP which states that a complete disclosure of facts with adequate measures and description, is required in respect of each account viz., loan provided to an employee, debtors, inventory.
Conclusion
Form 10-K has been immeasurably valuable for auditors, as it prescribes the SEC provisions, which binds the company to represent true and fair view of financial status of a company, which ideally makes the task of an auditor much easier in inspection of evidences and sources of reliable documents. More than auditing, a well acquaintance with the company officials is required for an auditor to perform auditing and for better understanding of the status of business.
Conclusively, there are four major important points for an auditor to conduct an audit. Firstly, a thorough knowledge of GAAP and SAS. Secondly, a complete understanding of business of a company for the purpose of audit. Thirdly, assessment of risk, sources of reliable evidences and to seek assistance of staff and management of company. Finally, accurate assessment of information that is relevant and useful for performing audit as the entire process of audit is time bound and it has to be effective in providing an accurate result.
References
Auditing and Assurance Standards Board, Auditing Standard ASA 500 Audit Evidence Accessed on 9 November 2006.
http://www.auasb.gov.au/docs/AUASB_Standards/ASA_500_28-04-06.pdf
Thomas A.Ratchliff, John Stephen Grice, Sr. Evaluating Audit Differences Accessed 9 November 2006
http://www.nysscpa.org/cpajournal/2002/0102/features/f012802.htm