Question

What must you consider when looking at materiality while auditing? Further, why should we use materiality in an audit? What is a general amount of materiality for a given audit?

Answer 1

ANSWER:-  

Consider the followings while looking at materiality while auditing:-

The concept of materiality is therefore fundamental to the audit. It is applied by auditors at the planning stage, and when performing the audit and evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements. While materiality is first determined at the planning stage, auditors need to be mindful that circumstances may change during the audit or some of the audit findings may mean that the initial assessments have to be reassessed.

However, highlight some key words and phrases in relation to materiality in the context of an audit which include;-

• misstatements (including omissions) which could influence decisions of users of the financial statements;

• judgement (ie, there is not a single right answer) based on surrounding circumstances including the size and nature of the misstatement; and

• that those decisions are based on the users’ common needs as a group.

Why should we use materiality in an audit?

As the basis for the auditor’s opinion, International Standard on Auditing require auditors to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement. The concept of materiality is therefore fundamental to the audit. It is applied by auditors at the planning stage, and when performing the audit and evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements.

About International Standards:-

International Standards is a digital resource on international standards providing access to high quality technical information that is both practical and online, bringing benefits to individual professional accountants and their local professional bodies, and supporting the standing of the global profession.

A general amount of materiality for a given audit:-

Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy.

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP).

As a simple example, an expenditure of ten cents on paper is generally immaterial, and, if it were forgotten or recorded incorrectly, then no practical difference would result, even for a very small business. However, a transaction of many millions of dollars is almost always material, and if it were forgotten or recorded incorrectly, then financial managers, investors, and others would make different decisions as a result of this error than they would have had the error not been made.

The assessment of what is material – where to draw the line between a transaction that is big enough to matter or small enough to be immaterial – depends upon factors such as the size of the organization's revenues and expenses, and is ultimately a matter of professional judgment.