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Summary Auditing 288/388: Materiality
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This is an in-depth document detailing audit materiality - Stellenbosch University.
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AUDIT MATERIALITY• Discuss the concept of materiality and apply in practical situations.
• Describe the role that materiality plays in the different stages of the audit.
• Calculate the materiality figure (with discussion of the factors which were evaluated).
• Describe the relationship of materiality with audit risk and apply practically.
UNDERLYING PRINCIPLES
WHAT IS MATERIALITY?
A. General definition
• Information in the financial statements must not be aggregated or
disaggregated in a manner that obscures useful information.
• Materiality requirements apply to the statements of: Definition
o Profit or loss and other comprehensive income, Important & needing to be
o Statement of financial position considered
o Statement of cash flows and Information affects plans
o Statements of changes in equity and to the notes. or decisions in a
• When an IFRS requires a specific disclosure, the noticeable way (e.g. She
omitted information that was
resulting information must be assessed to determine material to the case)
whether it is material and consequently whether
presentation or disclosure of that information is warranted.
B. Definition in an audit context
• Information is material if:
o Omission thereof or the misstatement thereof can influence the
economic decisions of users made on financial statements.
• The materiality depends on:
o The size (rand value) of item or of the mistake (quantitative) or
o Nature (qualitative) E.g. Payments to directors or fraud committed by
management or if cannot continue to operate your business or
profession.
o Judged in surrounding circumstances
o Professional judgment
WHY IS MATERIALITY NECESSARY?
A. Why is it needed?
• An auditor does not provide 100% guarantee, only performs sample-based
testing to determine which items will affect the decision of users.
• Auditors only provide reasonable assurance that the financial statements are
free from material misstatements.
, B. Planning: determine acceptable materiality level
• For the detection of quantitative material misstatements
• Determining factor = Extent of audit tests
o What will cause the AFS to be materially misstated?
o Help determine which financial items to inspect and which audit
procedures to follow.
o Detection risk effects testing: The lower materiality = more testing will
be done vs higher materiality less testing
WHEN IS MATERIALITY CALCULATED?
• When the overall FS are affected the materiality should be calculated.
Planning Reviewing Completion
(ISA 320) (ISA 315) (ISA 320)
• Materiality during • A review is done • Materiality during
planning of the audit during the audit to re- finalisation of the
(preliminary evaluate. audit.
examination) • Audited figures
• Helps identify which • Have more knowledge
financial statements and circumstances
items to investigate. can change.
• Determine which • Evaluate audit
audit procedures differences
• Not audited • Audited
HOW IS MATERIALITY CALCULATED?
Apply professional judgement - SCI vs SFP
• Quantitative indicator: Calculate figure
o Follow the framework
o Provide cut-off point or threshold = to determine the nature, timing
and extent of audit work on the specific balance (Audit approach)
• Qualitative considerations:
o Consider nature of item or mistake, for example:
§ Inadequate/ improper disclosures;
§ Related party transactions, etc.
• 'Material account balance'
o Contains risk of material misstatement and is
o Based on size (quantitative) or qualitative characteristics
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