IntroductionIntroduction

Introduction

4 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on materiality and its relationship with audit risk.

5 The auditor shall consider materiality and its relationship with audit risk.

6 “Materiality” means, in relation to information, that information which if omitted, misstated or not disclosed has the potential to adversely affect decisions about the allocation of scarce resources made by users of the financial report or the discharge of accountability by management or the governing body of the entity. Materiality is discussed in Accounting Standard AASB 1031 Materiality.

7 The Australian Accounting Standards explain the role of materiality in making judgements in the preparation and presentation of financial reports by the entity. This Auditing Standard explains the role of materiality in planning an audit and evaluating audit evidence. This includes:

• establishing a preliminary materiality level to plan audit procedures and selection strategies;
• assessing both qualitative and quantitative materiality factors when evaluating the results of audit procedures;
• re-assessing the preliminary materiality level used in planning the audit, based on the outcomes of audit procedures and actual results for the period, to determine whether there is a need to extend audit procedures; and
• evaluating the effect of uncorrected misstatements in the financial report and the impact on audit risk.