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SA 320: Materiality in Planning and Performing an Audit - Coggle Diagram
SA 320: Materiality in Planning and Performing an Audit
Materiality in Context of an Audit
FRFW — preparation & presentation
Misstatements, incl. omissions,
are considered material
, if they, individually or in aggregate,
could reasonably be expected to influence the economic decisions of users
.
Judgements
about materiality are made in the light of
surrounding circumstances
and
affected by size & nature of misstatements
.
Judgements about matters that are material to users of FS are based on
consideration of common financial information needs of users as a group
.
Materiality is a matter of
professional judgement
.
The concept of materiality is applied by auditor in both
Planning & performing the audit, and
Evaluating effect of both identified misstatements and uncorrected misstatements.
Auditor's judgement of size of misstatement that will be treated as material, provides a basis for
Determining NTE of RAP
Identifying & Assessing ROMM
Determining NTE of FAP
The circumstances related to some misstatements may force the auditor to evaluate them as material even if they are below materiality.
Materiality and the Audit Risk
Audit Risk is the risk that the auditor expresses an inappropriate opinion when the FS are materially misstated.
It is a function of ROMM and Detection Risk.
Materiality & audit risk are considered throughout the audit, particularly when
Identifying and assessing ROMM
Determining NTE of FAP
Evaluating effect of uncorrected misstatements on FS and forming an opinion in AR
Audit should be planned to keep the audit risk to an acceptably low level.
There is an inverse relationship between materiality and degree of audit risk i.e., higher the materiality level, lower the audit risk and vice-versa.
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Determining Materiality for FS as a whole
A percentage is often applied to a chosen benchmark
Identification of appropriate benchmark includes considering
Elements of FS
Items on which attention of users is focused
Nature of entity
Ownership structure — the way it is financed
Relative volatility of benchmark
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Materiality for classes of transactions, account balances, and disclosures
Factors that may indicate misstatements of lesser amounts than materiality for FS as a whole, includes considering:
Whether
L&R or applicable FRFW affect users' expectations
regarding
measurements/disclosure
of certain items
Key disclosures in relation to
industry in which the entity operates
Whether attention is focused on a
particular aspect of entity's business
Revision of Materiality as audit progresses
In the event of becoming aware of info. during the audit that would have caused the auditor to have determined a different amount initially.
If the auditor concludes a lower materiality than initially determined
, auditor shall determine whether it is necessary to revise performance materiality, and whether NTE of FAP remain appropriate.
Documentation
Materiality for FS as a whole
If applicable, for particular assertions
Performance materiality
Any revision as audit progresses
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Performance Materiality
Means the amount or amounts set by the auditor at less than materiality for the FS as a whole, to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements, exceeds the materiality level for the FS as a whole.
Need:
Planning the audit solely to detect individual MM overlooks the fact that aggregate of individual immaterial misstatements may cause the FS to materially misstated.
This leaves no margin for possible undetected misstatements.
Hence, PM is set at a level lower than materiality level.