PSA 320 "AUDIT MATERIALITY" ("MATERIALITY"…
PSA 320 "AUDIT MATERIALITY"
establish standards and provide guidance on the concept of materiality and its relationship
with audit risk
Information is material if its omission could influence the economic decisions of users taken on the basis of the FS
depends on the size of the error judged in the particular circumstances of its omission or misstatement
provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful
The assessment of what is material is a matter of
(quality) of misstatements need to be considered.
To consider the possibility of misstatements of relatively small amounts cumulatively, could have a material effect on the FS
Materiality should be considered by the auditor when:
determining the nature, timing and extent of audit procedures; and
evaluating the effect of misstatements
BETWEEN MATERIALITY AND AUDIT RISK
higher the materiality level, the lower the audit risk and vice versa
If actual results of operations and financial position are substantially different, the assessment of materiality and audit risk may also change.
assessment of materiality may be
different at the time of initially planning
from at the time of
evaluating the results
The auditor would compensate for this by either:
reducing the assessed level of control risk, supporting the reduced level by carrying out extended or additional tests of control; or
reducing detection risk by modifying the nature, timing and extent of planned substantive procedures.
The auditor may intentionally set materiality level at a lower level. This may be done to reduce the likelihood of undiscovered misstatements and to provide a margin of safety.
EVALUATING THE EFFECT
Assess whether the aggregate of uncorrected misstatements is material.
The aggregate of uncorrected misstatements comprises:
specific misstatements identified by the auditor including the net effect of
uncorrected misstatements identified during the audit of previous periods; and
the auditor's best estimate of other misstatements which cannot be specifically identified
If the auditor concludes that the misstatements may be material, consider reducing audit risk by extending audit procedures or requesting management to adjust the FS
If management refuses to adjust the FS, and the results of extended audit procedures,consider the appropriate modification in accordance with PSA 700
This PSA shall be effective for audits of financial statements for periods ending on or after June 30, 2003.