Preliminary Assessments of Materiality

Preliminary Assessments of Materiality

10 When planning the audit, under paragraph 9 of this Auditing Standard, the auditor needs to consider what would make the financial report materially misstated. The auditor’s assessment of materiality, related to specific account balances and classes of transactions, helps the auditor to select audit procedures that, in combination, can be expected to reduce audit risk to an acceptably low level, as discussed in ASA 300 Planning an Audit of a Financial Report.

11 Under ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, the auditor needs to identify and assess the risks of material misstatement and determine which of the risks identified are, in the auditor’s judgement, risks that require special audit consideration. There is a relationship between materiality and the level of audit risk, that is the higher the audit risk, the lower the materiality level. Under paragraph 9 of this Auditing Standard, the auditor needs to take this relationship between materiality and audit risk into account when determining the nature, timing and extent of audit procedures.

12 An auditor shall make a preliminary assessment of materiality to establish an appropriate quantitative materiality level to plan risk assessment procedures, further audit procedures at the assertion level, selection strategies and other audit procedures.

13 An auditor’s consideration of materiality is a matter of professional judgement, and is affected by the auditor’s perception of the financial information needs of users of the financial report. If an applicable financial reporting framework contains a definition of materiality, it provides a frame of reference to the auditor when determining materiality for planning and performing the audit. Ordinarily, the auditor considers prior year financial results, year-to-date results and balances, and budgets or forecasts for the financial period to establish a preliminary materiality level for planning the audit.

14 When establishing a preliminary assessment of materiality, under paragraph 12 of this Auditing Standard, the auditor needs to have regard to:

(a) the reliability of management information;

(b) factors which may indicate deviations from normal activities; and

(c) qualitative factors (refer paragraphs 20-22).

15 Under ASA 315, the auditor needs to assess the risks of material misstatement in relation to the financial report and in relation to, classes of transactions, account balances and disclosures. Materiality might be influenced by qualitative factors such as legal and regulatory requirements, and considerations relating to individual financial report account balances and relationships. This process could result in different materiality levels arising from consideration of both quantitative and qualitative factors depending on the aspect of the financial report being considered.

16 Although the auditor’s preliminary assessment of materiality is largely based on quantitative factors, under paragraphs 12 and 21 of this Auditing Standard, the auditor needs to consider both the amount (quantity) and nature (quality) of misstatements when assessing the outcomes of audit procedures.