ISA 320: Materiality in Planning and Performing an Audit explains the concept of materiality and how it is used by the auditor in engagement to reach important conclusions regarding procedures and evidence obtained. Concept of materiality is the core concept in risk-based audit approaches.
As per ISA 320, the auditor is required to determine materiality in order to reach important conclusions including; assessing risk of material misstatement, designing audit procedure in response to assessed risk and materiality level determined, in estimating the effects of undetected misstatements and lastly in forming an audit opinion. An Auditor determines the materiality by exercising his professional judgment.
Required:
i) Explain materiality. (2 marks)
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Misstatements or omissions are generally consider material, individually or in aggregate if they can reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the omission or misstatement judged in its particular circumstances. Materiality provides a threshold or cut off point rather than being a primary qualitative characteristic which information must have to be useful.
ii) Briefly assess FOUR (4) ways materiality impacts on an audit. (4 marks)
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- Materiality helps auditors determine which items to test, as material items must be subject to substantive procedures.
- Materiality helps auditors determine whether to use sampling (for example, if all items in a population are material, sampling will be inappropriate).
- Materiality helps determine what level of misstatement will lead to a modified audit opinion.
- Materiality must be calculated at the planning stage and kept under review and must be reassessed during the course of the audit.
- Auditors must also consider whether factors make items material by reason other than value during the audit.
- Auditors must keep a record of misstatements and assess whether they are collectively material.
(Any 4 points for 4 marks)