Qualitative FactorsQualitative Factors

Qualitative Factors

20 The magnitude of a misstatement alone is only one factor used to assess materiality. Under paragraph 21 of this Auditing Standard, the auditor needs to review each misstatement in the context of information relevant to users of the financial report, by considering qualitative factors and the circumstances in which the misstatement or judgement has been made.

21 The auditor shall consider qualitative factors, which impact on the materiality of individual misstatements, to assess:

(a) the significance of the misstatement to the particular entity;

(b) the pervasiveness of the misstatement; and

(c) the effect of misstatement on the financial report as a whole.

22 Examples of qualitative material misstatements include:

• the inadequate or improper description of an accounting policy when it is likely that a user of the financial report would be misled by the description;
• failure to disclose a breach of regulatory requirements when it is likely that the consequent imposition of regulatory restrictions may significantly impair operating capability;
• matters which impact on the integrity of the financial records;
• matters which indicate weaknesses in the entity’s system of internal control which may have further impact on various aspects of the financial reporting process; and
• matters which suggest fraudulent financial reporting practice, such as management attempting to “manage” or manipulate the entity’s reported earnings. For example, intentional misstatements could be used by management as a means of achieving forecast results.