Question

Explain how setting a lower materiality level affects the number of items that are material and affects the decisions about the nature, extent, and timing of the audit procedures.

Answer 1

Audit Risk and Materiality Level are inversely proportional. So the lower the audit risk the higher will be the materiality level, and higher the audit risk the lower will be materiality level.

We can say for lower materiality level the audit procedures would be more robust, generally time taking and would involve more in-depth analysis and checking and verification. This might involve lot of reliance on corroborative evidence as well.

If materiality level are set low for a few or particular items then more substantive procedures would be brought in practice and analytical procedures would only be used generally upto setting of materiality level. This will also involve a larger sample size than is being normally audited. Thus approach would be to reach more towards conclusive evidence. As is evident from above such an audit will be more time and resource consuming.

Also if materiality levels are set low for the financial statements as a whole then it will involve higher no. of items being checked, simultaneously more lower value items will also find place in sample in comparison to the case where higher materiality levels are set.

Such a case happens if a fraud is reported by management for a department, e.g. lets say fraud reported in purchase department. Or, if an auditor perceives that their might be a risk of fraud, in case management is not open to share information required by the Auditor for performance of audit procedures. In former, materiality level will be set low for purchase transactions and detailed checking and verification would be done for them. And in latter case, audit would be done more in depth if auditor perceives reluctance on part of management to share information, as materiality level will be set lower or changed to lower level for financial statements as a whole.