Question

Prior to the withdrawal of AASB 1031 and with reference to the AASB 1031 Materiality (issued by the Australian Accounting Standards Boards - AASB) and the ASA 320 Materiality in Planning and Performing an Audit and ASA 450 Evaluation of Misstatements Identified during an Audit (issued by the Auditing and Assurance Standards Board – AUASB), :
a. Define materiality.
b. Outline the qualitative and quantitative guidelines of materiality.
c. How the concepts and constructs of “materiality” influence the auditors’ professional judgment on misstatements

Answer 1

1. Materiality is the threshold above which missing or incorrect information in financial statements is considered to have an impact on the decision making of users. It is relative term and depends upon the size of financial statements and the decision to be made of users.
2. Qualitative:
   • The potential effect of the misstatement on trends, especially trends in profitability.
   • A misstatement that changes a loss into income or vice versa.
   • The potential effect of the misstatement on the company's compliance with loan covenants, other contractual agreements, and regulatory provisions.
   • The existence of statutory or regulatory reporting requirements that affect materiality thresholds.

                Quantative: percentage of production or sales volume, percentage of total capacity, percentage yield or efficiency factors.

3. If there are multiple small amounts which are wrong it may accumulate to be material for the auditors judgement in which case he may have to alter his audit approach and be more specific to the events verficiation