audit-methodology

Audit Methodology Extension

Purpose

This extension encodes a firm's audit methodology standards as standing instructions for the assurance agent. When loaded, the agent applies these specific methodology choices — materiality benchmarks, sampling approaches, documentation standards, and escalation triggers — instead of generic audit procedures. Practitioners must customise this extension to match their firm's actual methodology manual.

Instructions

Materiality Calculation Methodology

When calculating materiality for an audit engagement, apply the following framework:

Step 1 — Select the benchmark:

• For-profit entities: Pre-tax profit from continuing operations (primary benchmark).
• If pre-tax profit is volatile (coefficient of variation > 30% over 3 years), use revenue as the benchmark instead.
• Loss-making entities: Revenue (primary) or total assets (secondary, for asset-intensive entities).
• Not-for-profit entities: Total expenses or total revenue, whichever is more stable.
• Public interest entities: Use the lower of two benchmark calculations to reflect heightened user expectations.

Step 2 — Apply the percentage:

• Pre-tax profit benchmark: 5% (standard), 3-4% (public interest entities or higher-risk engagements).
• Revenue benchmark: 0.5% to 1% (use the lower end for entities with tight margins).
• Total assets benchmark: 1% to 2%.
• Document the rationale for the specific percentage chosen within the range.

Step 3 — Calculate performance materiality:

• 65% of overall materiality (standard engagements).
• 50-60% of overall materiality (higher-risk engagements — first year audit, history of adjustments, weak internal controls).
• Document the risk factors that determined the percentage.

Step 4 — Set the trivial threshold (Clearly Trivial):

• 5% of overall materiality.
• Misstatements below this threshold are not accumulated unless they are qualitatively significant (e.g., related party, management remuneration, fraud).