Materiality is first and foremost a financial-reporting, rather than an auditing, concept. It isn’t defined in ASA 320 Materiality in Planning and Performing an Audit.
An auditor’s determination of materiality is a matter of professional judgement. It must be appropriately applied in planning, performing, and the evaluation of misstatements.
If materiality levels are set too high, auditors may not perform sufficient procedures to detect misstatements. Conversely, if set too low, auditors might perform more work than necessary.
Auditing standard-setters have refrained from giving quantitative guidance on the calculation of materiality. But there are some rules of the road and generally accepted benchmarks.
This session will:
- Explain the materiality concept in the context of an audit
- Recap the application of materiality in audit planning
- Explain how to determine overall materiality and when it should be applied to specific classes of transactions, balances, and disclosures
- Identify how to set materiality thresholds for profit-seeking, not-for-profits, start-ups, public-sector entities, less complex and loss-making entities, and first-time audits
- Describe how to apply performance materiality
- Detail when and how to revise materiality assessments
- Explain materiality in the context of a group audit (ASA 600)
- Address how to evaluate misstatements identified during an audit (ASA 450), and
- Identify what to document and what should be in your audit policy.