In: Accounting
Question 1
Under what circumstances would the auditor request the accounts to be adjusted for individually immaterial errors?
Immaterial errors means errors which has little or no relevance with the outcome or the result.Errors are considered immaterial if the decision of the user is not affected due to such errors.
As per Standard of Accounting 320, Material and Audit Evidence involves an auditor to check whether the errors during the audit are immaterial individual or in totality.
As errors which are individually immaterial but when combined with other errors can influence or has a greater impact on the outcome or decision to be taken so accordingly the auditor can form an opinion which is the basic principle of Auditing.
So when the errors are individually immaterial but in aggregate becomes material should be adjusted for.
Circumstances where the auditor request the accounts to be adjusted even for immaterial errors are below explained with certain examples:-
An estimate amount is set that beyond which all the transactions would be considered material. So according to that suppose that estimation is Miscellaneous Expense upto Rs 80,000 is considered immaterial and would not have impact on outcome.
Example 1 :-There are 2 types of expenses categorized under the head Miscellaneous Expense one amounting to Rs 55,000 and another expense amounts to Rs 48,000.Though these expense are below 80,000 but in aggregate it is beyond the criteria set for material errors.
So these expense if considered individual then its individually immaterial error not required to be adjusted but when both the transactions are considered it becomes material so this errors are required to be adjusted.
Example 2 :- Material is set for 1,50,000. Two errors individually reduce profits of Rs 92,000 and Rs 73,000 but both the errors will be adjusted because the total error is 1,65,000 which is material in aggregate but individually immaterial.
Different audit procedures are carried out by the auditor to find the material level and then adjusted for.