Question

Discuss the audit risk associated with “materiality” should the threshold be disclosed to an auditor’s client.

Answer 1

Regulators of some countries requires auditors to disclose materiality in the auditor's report of listed companies. This was done so that stakeholders should understand critical audit matter along with materiality. However it should be noted that the International Auditing and Assurance Standards Board specifies that auditor's should not disclose materiality with regard to the engagement. Voluntary disclosure of materiality is also not prohibited in the standards. So the situation is indeed conflicting.

There is an audit risk associated with disclosing materiality to the audit client. Management can take undue advantage of materiality to hide their errors or misstatements. In some instances management too much specify materiality figure to often uncorrect misstatements. Accounting policies are often characterized by taking into account materiality by the management. Auditors in that case will end up giving an incorrect opinion. As auditing standards requires auditors to consider aggregate level of misstatements uncorrected in the financial statements. This will an audit risk for the engagement team. Hence practically the auditor should not disclose the materiality figure to the audit client for avoiding the audit risk associated with it.