ASA 320 - Materiality in Planning and Performing an Audit - October 2009
In ForceCTH
Jurisdiction
Commonwealth
Collection
legislative instrument
Plain English Summary
6/10 complexity
This Auditing Standard sets out what auditors must do about materiality when planning and carrying out an audit: decide overall materiality and lower “performance materiality”, revise those decisions if new information emerges, and record the amounts and reasoning. It applies to audits of financial reports under the Corporations Act and other audits. Auditors use these judgments to size testing, allocate resources and decide whether misstatements would influence users’ economic decisions.
This compiled Auditing Standard, ASA 320 Materiality in Planning and Performing an Audit (as amended to 27 April 2022), sets out the auditor’s requirements and guidance for applying the concept of materiality when planning and performing an audit of a financial report. Mechanically, the Standard requires auditors to:
determine materiality for the financial report as a whole at the stage of establishing the overall audit strategy (para. 10; “Determining Materiality and Performance Materiality When Planning the Audit”);
determine any lower materiality level or levels for particular classes of transactions, account balances or disclosures where misstatements of lesser amounts could reasonably be expected to influence users (para. 10);
determine performance materiality, being one or more amounts set below overall materiality to reduce aggregation risk to an appropriately low level (definition; para. 11);
revise materiality and, if applicable, performance materiality during the audit when new information arises that would have led to a different initial determination (paras. 12-13);
document the amounts and the factors considered in determining materiality, particular materiality levels, performance materiality and any revisions (para. 14).
The Standard applies to audits of financial reports under the Corporations Act 2001 and to audits of financial reports or complete sets of financial statements for other purposes (Aus 0.1). It is operative for reporting periods commencing on or after 1 January 2010 (Aus 0.3), with subsequent amendments compiled to 27 April 2022 (Compilation Details).
The Standard also includes application and explanatory material that links materiality to audit risk, provides guidance on selecting benchmarks and percentages, addresses particular considerations for small entities and public sector entities, and explains why performance materiality is required to address aggregation risk (paras. A1-A14, including public sector guidance at A10). The compilation confirms conformity with International Standard on Auditing ISA 320, and notes that paragraphs added by the AUASB are identified with the prefix “Aus” (Authority Statement).
Current sections
Direct links to the current provisions in ASA 320 - Materiality in Planning and Performing an Audit - October 2009.
27
Obtaining a Copy of this Auditing Standa
Obtaining a Copy of this Auditing Standard
Obtaining a Copy of this Auditing Standard
The most recently compiled versions of Auditing Standards, original Standards and amending Standards (see Compilation Details) are available on the AUASB website: www.auasb.gov.au
Contact Details
Contact Details
Contact Details
Auditing and Assurance Standards BoardPhone: (03) 8080 7400E-mail: enquiries@auasb.gov.auPostal Address:PO Box 204Collins Street WestMelbourne Victoria 8007AUSTRALIA
Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au. Otherwise, no part of this Auditing Standard may be reproduced, stored or transmitted in any form or by any means without the prior written permission of the AUASB except as permitted by law.
This Auditing Standard reproduces substantial parts of the corresponding International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) and published by the International Federation of Accountants (IFAC), in the manner described in the statement on Conformity with International Standards on Auditing. The AUASB acknowledges that IFAC is the owner of copyright in the International Standard on Auditing incorporated in this Auditing Standard throughout the world.
All existing rights in this material are reserved outside Australia. Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only.
Further information and requests for authorisation to reproduce this Auditing Standard for commercial purposes outside Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au. Any decision to approve a request may also require the agreement of IFAC.
ISSN 1833-4393
CONTENTS
CONTENTS
CONTENTS
COMPILATION DETAILS
AUTHORITY STATEMENT
CONFORMITY WITH INTERNATIONAL STANDARDS ON AUDITING
Materiality and Audit Risk.....................................................A1
Materiality in the Context of an Audit.............................................A2
Determining Materiality and Performance Materiality When Planning the Audit..........A3-A13
Revision as the Audit Progresses................................................A14
COMPILATION DETAILS
COMPILATION DETAILS
Obtaining a Copy of this Auditing Standard
The most recently compiled versions of Auditing Standards, original Standards and amending Standards (see Compilation Details) are available on the AUASB website: www.auasb.gov.au
Contact Details
Auditing and Assurance Standards BoardPhone: (03) 8080 7400E-mail: enquiries@auasb.gov.auPostal Address:PO Box 204Collins Street WestMelbourne Victoria 8007AUSTRALIA
Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au. Otherwise, no part of this Auditing Standard may be reproduced, stored or transmitted in any form or by any means without the prior written permission of the AUASB except as permitted by law.
This Auditing Standard reproduces substantial parts of the corresponding International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) and published by the International Federation of Accountants (IFAC), in the manner described in the statement on Conformity with International Standards on Auditing. The AUASB acknowledges that IFAC is the owner of copyright in the International Standard on Auditing incorporated in this Auditing Standard throughout the world.
All existing rights in this material are reserved outside Australia. Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only.
Further information and requests for authorisation to reproduce this Auditing Standard for commercial purposes outside Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au. Any decision to approve a request may also require the agreement of IFAC.
ISSN 1833-4393
CONTENTS
COMPILATION DETAILS
AUTHORITY STATEMENT
CONFORMITY WITH INTERNATIONAL STANDARDS ON AUDITING
Materiality and Audit Risk.....................................................A1
Materiality in the Context of an Audit.............................................A2
Determining Materiality and Performance Materiality When Planning the Audit..........A3-A13
Revision as the Audit Progresses................................................A14
COMPILATION DETAILS
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as Amended)
This compilation takes into account amendments made up to and including 27 April 2022 and was prepared on 1 March 2023 by the Auditing and Assurance Standards Board (AUASB).
This compilation is not a separate Auditing Standard made by the AUASB. Instead, it is a representation of ASA 320 (October 2009) as amended by other Auditing Standards which are listed in the Table below.
Table of Standards
Standard
Date made
Operative Date
ASA 320 [A]
27 October 2009
Financial reporting periods commencing on or after 1 January 2010
ASA 2011‑1 [B]
27 June 2011
Financial reporting periods commencing on or after 1 July 2011
ASA 2015‑1 [C]
1 December 2015
Financial reporting periods ending on or after 15 December 2016
ASA 2020‑1 [D]
3 March 2020
Financial reporting periods commencing on or after 15 December 2021[*]
ASA 2022-1 [E]
27 April 2022
Financial reporting periods commencing on or after 15 December 2023
Legislation History
Standard
Registration Number
Registration Date
Commencement Date
ASA 320
F2009L04080
12 November 2009
13 November 2009
ASA 2011‑1
F2011L01379
30 June 2011
1 July 2011
ASA 2015-1
F2015L02032
16 December 2015
17 December 2015
ASA 2020-1
F2020L00252
13 March 2020
14 December 2021
ASA 2022-1
F2022L00712
19 May 2022
14 December 2023
Table of Amendments
Paragraph affected
How affected
By … [paragraph]
Title Page
Amended
ASA 2011-1 [31]
6
Amended
ASA 2015-1 [101]
Footnotes 3 and 4
Addition
ASA 2015-1 [102]
Aus A1.1 and related footnote *
Deleted
ASA 2015-1 [103]
Heading after paragraph A1
Addition
ASA 2015-1 [104]
A2
Addition
ASA 2015-1 [105 and 107]
Footnote 13
Addition
ASA 2015-1 [106]
A11
Amended
ASA 2015-1 [108]
Aus A10.1 and related footnote *
Deleted
ASA 2015-1 [109]
Footnote 3
Amended
ASA 2020-1 [67]
Footnote 13
Amended
ASA 2020-1 [68]
9
Amended
ASA 2022-1 [30]
A13
Amended
ASA 2022-1 [31]
AUTHORITY STATEMENT
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as amended to 27 April 2022) is set out in paragraphs Aus 0.1 to A14.
This Auditing Standard is to be read in conjunction with ASA 101 Preamble to AUASB Standards, which sets out how AUASB Standards are to be understood, interpreted and applied. This Auditing Standard is to be read also in conjunction with ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards.
Conformity with International Standards on Auditing
This Auditing Standard conforms with International Standard on Auditing ISA 320 Materiality in Planning and Performing an Audit issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard‑setting board of the International Federation of Accountants (IFAC).
Paragraphs that have been added to this Auditing Standard (and do not appear in the text of the equivalent ISA) are identified with the prefix “Aus”.
Compliance with this Auditing Standard enables compliance with ISA 320.
Auditing Standard ASA 320 Materiality in
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as Amended)
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as Amended)
This compilation takes into account amendments made up to and including 27 April 2022 and was prepared on 1 March 2023 by the Auditing and Assurance Standards Board (AUASB).
This compilation is not a separate Auditing Standard made by the AUASB. Instead, it is a representation of ASA 320 (October 2009) as amended by other Auditing Standards which are listed in the Table below.
Table of Standards
Table of Standards
Table of Standards
Standard
Date made
Operative Date
ASA 320 [A]
27 October 2009
Financial reporting periods commencing on or after 1 January 2010
ASA 2011‑1 [B]
27 June 2011
Financial reporting periods commencing on or after 1 July 2011
ASA 2015‑1 [C]
1 December 2015
Financial reporting periods ending on or after 15 December 2016
ASA 2020‑1 [D]
3 March 2020
Financial reporting periods commencing on or after 15 December 2021[*]
ASA 2022-1 [E]
27 April 2022
Financial reporting periods commencing on or after 15 December 2023
Legislation History
Standard
Registration Number
Registration Date
Commencement Date
ASA 320
F2009L04080
12 November 2009
13 November 2009
ASA 2011‑1
F2011L01379
30 June 2011
1 July 2011
ASA 2015-1
F2015L02032
16 December 2015
17 December 2015
ASA 2020-1
F2020L00252
13 March 2020
14 December 2021
ASA 2022-1
F2022L00712
19 May 2022
14 December 2023
Table of Amendments
Table of Amendments
Table of Amendments
Paragraph affected
How affected
By … [paragraph]
Title Page
Amended
ASA 2011-1 [31]
6
Amended
ASA 2015-1 [101]
Footnotes 3 and 4
Addition
ASA 2015-1 [102]
Aus A1.1 and related footnote *
Deleted
ASA 2015-1 [103]
Heading after paragraph A1
Addition
ASA 2015-1 [104]
A2
Addition
ASA 2015-1 [105 and 107]
Footnote 13
Addition
ASA 2015-1 [106]
A11
Amended
ASA 2015-1 [108]
Aus A10.1 and related footnote *
Deleted
ASA 2015-1 [109]
Footnote 3
Amended
ASA 2020-1 [67]
Footnote 13
Amended
ASA 2020-1 [68]
9
Amended
ASA 2022-1 [30]
A13
Amended
ASA 2022-1 [31]
AUTHORITY STATEMENT
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as amended to 27 April 2022) is set out in paragraphs Aus 0.1 to A14.
This Auditing Standard is to be read in conjunction with ASA 101 Preamble to AUASB Standards, which sets out how AUASB Standards are to be understood, interpreted and applied. This Auditing Standard is to be read also in conjunction with ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards.
Conformity with International Standards on Auditing
This Auditing Standard conforms with International Standard on Auditing ISA 320 Materiality in Planning and Performing an Audit issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard‑setting board of the International Federation of Accountants (IFAC).
Paragraphs that have been added to this Auditing Standard (and do not appear in the text of the equivalent ISA) are identified with the prefix “Aus”.
Compliance with this Auditing Standard enables compliance with ISA 320.
AUTHORITY STATEMENT
AUTHORITY STATEMENT
AUTHORITY STATEMENT
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as amended to 27 April 2022) is set out in paragraphs Aus 0.1 to A14.
This Auditing Standard is to be read in conjunction with ASA 101 Preamble to AUASB Standards, which sets out how AUASB Standards are to be understood, interpreted and applied. This Auditing Standard is to be read also in conjunction with ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards.
Conformity with International Standards
Conformity with International Standards on Auditing
Conformity with International Standards on Auditing
This Auditing Standard conforms with International Standard on Auditing ISA 320 Materiality in Planning and Performing an Audit issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard‑setting board of the International Federation of Accountants (IFAC).
Paragraphs that have been added to this Auditing Standard (and do not appear in the text of the equivalent ISA) are identified with the prefix “Aus”.
Compliance with this Auditing Standard enables compliance with ISA 320.
Auditing Standard ASA 320
Auditing Standard ASA 320
Auditing Standard ASA 320
The Auditing and Assurance Standards Board (AUASB) made Auditing Standard ASA 320 Materiality in Planning and Performing an Audit pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001, on 27 October 2009.
This compiled version of ASA 320 incorporates subsequent amendments contained in other Auditing Standards made by the AUASB up to and including 27 April 2022 (see Compilation Details).
Auditing Standard ASA 320
Materiality in Planning and Performing an Audit
Application
Aus 0.1 This Auditing Standard applies to:
(a) an audit of a financial report for a financial year, or an audit of a financial report for a half-year, in accordance with the Corporations Act 2001; and
(b) an audit of a financial report, or a complete set of financial statements, for any other purpose.
Aus 0.2 This Auditing Standard also applies, as appropriate, to an audit of other historical financial information.
Operative Date
Aus 0.3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 January 2010. [Note: For operative dates of paragraphs changed or added by an Amending Standard, see Compilation Details.]
Introduction
Scope of this Auditing Standard
This Auditing Standard deals with the auditor’s responsibility to apply the concept of materiality in planning and performing an audit of a financial report. ASA 450[1] explains how materiality is applied in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial report.
Materiality in the Context of an Audit
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of a financial report. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report;
Materiality in Planning and Performing a
Materiality in Planning and Performing an Audit
Auditing Standard ASA 320
The Auditing and Assurance Standards Board (AUASB) made Auditing Standard ASA 320 Materiality in Planning and Performing an Audit pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001, on 27 October 2009.
This compiled version of ASA 320 incorporates subsequent amendments contained in other Auditing Standards made by the AUASB up to and including 27 April 2022 (see Compilation Details).
Auditing Standard ASA 320
Materiality in Planning and Performing an Audit
Application
Aus 0.1 This Auditing Standard applies to:
(a) an audit of a financial report for a financial year, or an audit of a financial report for a half-year, in accordance with the Corporations Act 2001; and
(b) an audit of a financial report, or a complete set of financial statements, for any other purpose.
Aus 0.2 This Auditing Standard also applies, as appropriate, to an audit of other historical financial information.
Operative Date
Aus 0.3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 January 2010. [Note: For operative dates of paragraphs changed or added by an Amending Standard, see Compilation Details.]
Introduction
Scope of this Auditing Standard
This Auditing Standard deals with the auditor’s responsibility to apply the concept of materiality in planning and performing an audit of a financial report. ASA 450[1] explains how materiality is applied in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial report.
Materiality in the Context of an Audit
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of a financial report. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report;
Application
Application
Application
Aus 0.1 This Auditing Standard applies to:
(a) an audit of a financial report for a financial year, or an audit of a financial report for a half-year, in accordance with the Corporations Act 2001; and
(b) an audit of a financial report, or a complete set of financial statements, for any other purpose.
Aus 0.2 This Auditing Standard also applies, as appropriate, to an audit of other historical financial information.
Operative Date
Operative Date
Operative Date
Aus 0.3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 January 2010. [Note: For operative dates of paragraphs changed or added by an Amending Standard, see Compilation Details.]
Introduction
Introduction
Auditing Standard ASA 320
The Auditing and Assurance Standards Board (AUASB) made Auditing Standard ASA 320 Materiality in Planning and Performing an Audit pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001, on 27 October 2009.
This compiled version of ASA 320 incorporates subsequent amendments contained in other Auditing Standards made by the AUASB up to and including 27 April 2022 (see Compilation Details).
Auditing Standard ASA 320
Materiality in Planning and Performing an Audit
Application
Aus 0.1 This Auditing Standard applies to:
(a) an audit of a financial report for a financial year, or an audit of a financial report for a half-year, in accordance with the Corporations Act 2001; and
(b) an audit of a financial report, or a complete set of financial statements, for any other purpose.
Aus 0.2 This Auditing Standard also applies, as appropriate, to an audit of other historical financial information.
Operative Date
Aus 0.3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 January 2010. [Note: For operative dates of paragraphs changed or added by an Amending Standard, see Compilation Details.]
Introduction
Scope of this Auditing Standard
This Auditing Standard deals with the auditor’s responsibility to apply the concept of materiality in planning and performing an audit of a financial report. ASA 450[1] explains how materiality is applied in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial report.
Materiality in the Context of an Audit
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of a financial report. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report;
Scope of this Auditing Standard
Scope of this Auditing Standard
Scope of this Auditing Standard
This Auditing Standard deals with the auditor’s responsibility to apply the concept of materiality in planning and performing an audit of a financial report. ASA 450[1] explains how materiality is applied in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial report.
Materiality in the Context of an Audit
Materiality in the Context of an Audit
Materiality in the Context of an Audit
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of a financial report. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report;
Effective Date
Effective Date
Effective Date
[Deleted by the AUASB. Refer Aus 0.3]
Objective
Objective
Objective
The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit
Definition
Definition
Definition
For the purposes of this Auditing Standard, the following terms have the meanings attributed below:
Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial report as a whole to reduce aggregation risk to an appropriately low level. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.
Aggregation risk means the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial report as a whole.
Requirements
Requirements
Judgements about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and
Judgements about matters that are material to users of the financial report are based on a consideration of the common financial information needs of users as a group.[2] The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.
Such a discussion, if present in the applicable financial reporting framework, provides a frame of reference to the auditor in determining materiality for the audit. If the applicable financial reporting framework does not include a discussion of the concept of materiality, the characteristics referred to in paragraph 2 of this Auditing Standard provide the auditor with such a frame of reference.
The auditor’s determination 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. In this context, it is reasonable for the auditor to assume that users:
Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial report with reasonable diligence;
Understand that the financial report is prepared, presented and audited to levels of materiality;
Recognise the uncertainties inherent in the measurement of amounts based on the use of estimates, judgement and the consideration of future events; and
Make reasonable economic decisions on the basis of the information in the financial report.
The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial report and in forming the opinion in the auditor’s report. (Ref: Para. A1)
In planning the audit, the auditor makes judgements about misstatements that will be considered material. These judgements provide a basis for:
Determining the nature, timing and extent of risk assessment procedures;
Identifying and assessing the risks of material misstatement; [3] and
Determining the nature, timing and extent of further audit procedures.
The materiality determined when planning the audit does not necessarily establish an amount below which uncorrected misstatements, individually or in the aggregate, will always be evaluated as immaterial. The circumstances related to some misstatements may cause the auditor to evaluate them as material even if they are below materiality. It is not practicable to design audit procedures to detect all misstatements that could be material solely because of their nature. However, consideration of the nature of potential misstatements in disclosures is relevant to the design of audit procedures to address risks of material misstatement. In addition, when evaluating the effect on the financial report of all uncorrected misstatements, the auditor considers not only the size but also the nature of uncorrected misstatements, and the particular circumstances of their occurrence.[4] (Ref: Para. A2 )
Effective Date
[Deleted by the AUASB. Refer Aus 0.3]
Objective
The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit
Definition
For the purposes of this Auditing Standard, the following terms have the meanings attributed below:
Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial report as a whole to reduce aggregation risk to an appropriately low level. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.
Aggregation risk means the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial report as a whole.
Requirements
Determining Materiality and Performance Materiality When Planning the Audit
When establishing the overall audit strategy, the auditor shall determine materiality for the financial report as a whole. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial report as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures. (Ref: Para. A3-A12)
The auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures. (Ref: Para. A13)
Revision as the Audit Progresses
The auditor shall revise materiality for the financial report as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially. (Ref: Para. A14)
If the auditor concludes that a lower materiality for the financial report as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate.
Documentation
The auditor shall include in the audit documentation the following amounts and the factors considered in their determination:[5]
Materiality for the financial report as a whole (see paragraph 10 of this Auditing Standard);
If applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures (see paragraph 10 of this Auditing Standard);
Performance materiality (see paragraph 11 of this Auditing Standard); and
Any revision of (a)-(c) as the audit progressed (see paragraphs 12-13 of this Auditing Standard).
* * *
Application and Other Explanatory Material
Materiality and Audit Risk (Ref: Para. 5)
In conducting an audit of a financial report, the overall objectives of the auditor are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial report, and communicate as required by the Australian Auditing Standards, in accordance with the auditor’s findings.[6] The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.[7] Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial report is materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.[8] Materiality and audit risk are considered throughout the audit, in particular, when:
Identifying and assessing the risks of material misstatement;[9]
Determining the nature, timing and extent of further audit procedures;[10] and
Evaluating the effect of uncorrected misstatements, if any, on the financial report[11] and in forming the opinion in the auditor’s report.[12]
Materiality in the Context of an Audit (Ref: Para. 6)
Identifying and assessing the risks of material misstatement involves the use of professional judgement to identify those classes of transactions, account balances and disclosures, including qualitative disclosures, the misstatement of which could be material (i.e., in general, misstatements are considered to be material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report as a whole). When considering whether misstatements in qualitative disclosures could be material, the auditor may identify relevant factors such as:
The circumstances of the entity for the period (for example, the entity may have undertaken a significant business combination during the period).
The applicable financial reporting framework, including changes therein (for example, a new financial reporting standard may require new qualitative disclosures that are significant to the entity).
Qualitative disclosures that are important to users of the financial report because of the nature of an entity (for example, liquidity risk disclosures may be important to users of the financial report for a financial institution).[13]
Determining Materiality and Performance Materiality When Planning the Audit
Considerations Specific to Public Sector Entities (Ref: Para. 10)
In the case of a public sector entity, legislators and regulators are often the primary users of its financial report. Furthermore, the financial report may be used to make decisions other than economic decisions. The determination of materiality for the financial report as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) in an audit of the financial report of a public sector entity is therefore influenced by law, regulation or other authority, and by the financial information needs of legislators and the public in relation to public sector programs.
Use of Benchmarks in Determining Materiality for the Financial Report as a Whole (Ref: Para. 10)
Determining materiality involves the exercise of professional judgement. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial report as a whole. Factors that may affect the identification of an appropriate benchmark include the following:
The elements of the financial report (for example, assets, liabilities, equity, revenue, expenses);
Whether there are items on which the attention of the users of the particular entity’s financial report tends to be focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
The nature of the entity, where the entity is in its life cycle, and the industry and economic environment in which the entity operates;
The entity’s ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings); and
The relative volatility of the benchmark.
Examples of benchmarks that may be appropriate, depending on the circumstances of the entity, include categories of reported income such as profit before tax, total revenue, gross profit and total expenses, total equity or net asset value. Profit before tax from continuing operations is often used for profit-oriented entities. When profit before tax from continuing operations is volatile, other benchmarks may be more appropriate, such as gross profit or total revenues.
In relation to the chosen benchmark, relevant financial data ordinarily includes prior periods’ financial results and financial positions, the period-to-date financial results and financial position, and budgets or forecasts for the current period, adjusted for significant changes in the circumstances of the entity (for example, a significant business acquisition) and relevant changes of conditions in the industry or economic environment in which the entity operates. For example, when, as a starting point, materiality for the financial report as a whole is determined for a particular entity based on a percentage of profit before tax from continuing operations, circumstances that give rise to an exceptional decrease or increase in such profit may lead the auditor to conclude that materiality for the financial report as a whole is more appropriately determined using a normalised profit before tax from continuing operations figure based on past results.
Materiality relates to the financial report on which the auditor is reporting. Where the financial report is prepared for a financial reporting period of more or less than twelve months, such as may be the case for a new entity or a change in the financial reporting period, materiality relates to the financial report prepared for that financial reporting period.
Determining a percentage to be applied to a chosen benchmark involves the exercise of professional judgement. There is a relationship between the percentage and the chosen benchmark, such that a percentage applied to profit before tax from continuing operations will normally be higher than a percentage applied to total revenue. For example, the auditor may consider five percent of profit before tax from continuing operations to be appropriate for a profit-oriented entity in a manufacturing industry, while the auditor may consider one percent of total revenues or total expenses to be appropriate for a not-for-profit entity. Higher or lower percentages, however, may be deemed appropriate in the circumstances.
Considerations Specific to Small Entities
When an entity’s profit before tax from continuing operations is consistently nominal, as might be the case for an owner-managed business where the owner takes much of the profit before tax in the form of remuneration, a benchmark such as profit before remuneration and tax may be more relevant.
Considerations Specific to Public Sector Entities
In an audit of a public sector entity, total cost or net cost (expenses less revenues or expenditure less receipts) may be appropriate benchmarks for program activities. Where a public sector entity has custody of public assets, assets may be an appropriate benchmark.
Materiality Level or Levels for Particular Classes of Transactions, Account Balances or Disclosures (Ref: Para. 10)
Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial report as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report include the following:
Whether law, regulation or the applicable financial reporting framework affect users’ expectations regarding the measurement or disclosure of certain items (for example, related party transactions the remuneration of management and those charged with governance, and sensitivity analysis for fair value accounting estimates with high estimation uncertainty).
The key disclosures in relation to the industry in which the entity operates (for example, research and development costs for a pharmaceutical company).
Whether attention is focused on a particular aspect of the entity’s business that is separately disclosed in the financial report (for example disclosures about segments or a significant business combination).
In considering whether, in the specific circumstances of the entity, such classes of transactions, account balances or disclosures exist, the auditor may find it useful to obtain an understanding of the views and expectations of those charged with governance and management.
Performance Materiality (Ref: Para. 11)
Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate of individually immaterial misstatements may cause the financial report to be materially misstated, and leaves no margin for possible undetected misstatements. Performance materiality (which, as defined, is one or more amounts) is set at less than materiality for the financial report as a whole to reduce aggregation risk to an appropriately low level. Similarly, performance materiality relating to a materiality level determined for a particular class of transactions, account balance or disclosure is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in that particular class of transactions, account balance or disclosure exceeds the materiality level for that particular class of transactions, account balance or disclosure. The determination of performance materiality is not a simple mechanical calculation and involves the exercise of professional judgement. It is affected by the auditor’s understanding of the entity, updated during the performance of the risk assessment procedures; and the nature and extent of misstatements identified in previous audits and thereby the auditor’s expectations in relation to misstatements in the current period.
Revision as the Audit Progresses (Ref: Para. 12)
Materiality for the financial report as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) may need to be revised as a result of a change in circumstances that occurred during the audit (for example, a decision to dispose of a major part of the entity’s business), new information, or a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures. For example, if during the audit it appears as though actual financial results are likely to be substantially different from the anticipated period end financial results that were used initially to determine materiality for the financial report as a whole, the auditor revises that materiality.
Determining Materiality and Performance
Determining Materiality and Performance Materiality When Planning the Audit
Determining Materiality and Performance Materiality When Planning the Audit
When establishing the overall audit strategy, the auditor shall determine materiality for the financial report as a whole. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial report as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures. (Ref: Para. A3-A12)
The auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures. (Ref: Para. A13)
Revision as the Audit Progresses
Revision as the Audit Progresses
Revision as the Audit Progresses
The auditor shall revise materiality for the financial report as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially. (Ref: Para. A14)
If the auditor concludes that a lower materiality for the financial report as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate.
Documentation
Documentation
Documentation
The auditor shall include in the audit documentation the following amounts and the factors considered in their determination:[5]
Materiality for the financial report as a whole (see paragraph 10 of this Auditing Standard);
If applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures (see paragraph 10 of this Auditing Standard);
Performance materiality (see paragraph 11 of this Auditing Standard); and
Any revision of (a)-(c) as the audit progressed (see paragraphs 12-13 of this Auditing Standard).
* * *
Application and Other Explanatory Materi
Application and Other Explanatory Material
Judgements about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and
Judgements about matters that are material to users of the financial report are based on a consideration of the common financial information needs of users as a group.[2] The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.
Such a discussion, if present in the applicable financial reporting framework, provides a frame of reference to the auditor in determining materiality for the audit. If the applicable financial reporting framework does not include a discussion of the concept of materiality, the characteristics referred to in paragraph 2 of this Auditing Standard provide the auditor with such a frame of reference.
The auditor’s determination 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. In this context, it is reasonable for the auditor to assume that users:
Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial report with reasonable diligence;
Understand that the financial report is prepared, presented and audited to levels of materiality;
Recognise the uncertainties inherent in the measurement of amounts based on the use of estimates, judgement and the consideration of future events; and
Make reasonable economic decisions on the basis of the information in the financial report.
The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial report and in forming the opinion in the auditor’s report. (Ref: Para. A1)
In planning the audit, the auditor makes judgements about misstatements that will be considered material. These judgements provide a basis for:
Determining the nature, timing and extent of risk assessment procedures;
Identifying and assessing the risks of material misstatement; [3] and
Determining the nature, timing and extent of further audit procedures.
The materiality determined when planning the audit does not necessarily establish an amount below which uncorrected misstatements, individually or in the aggregate, will always be evaluated as immaterial. The circumstances related to some misstatements may cause the auditor to evaluate them as material even if they are below materiality. It is not practicable to design audit procedures to detect all misstatements that could be material solely because of their nature. However, consideration of the nature of potential misstatements in disclosures is relevant to the design of audit procedures to address risks of material misstatement. In addition, when evaluating the effect on the financial report of all uncorrected misstatements, the auditor considers not only the size but also the nature of uncorrected misstatements, and the particular circumstances of their occurrence.[4] (Ref: Para. A2 )
Effective Date
[Deleted by the AUASB. Refer Aus 0.3]
Objective
The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit
Definition
For the purposes of this Auditing Standard, the following terms have the meanings attributed below:
Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial report as a whole to reduce aggregation risk to an appropriately low level. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.
Aggregation risk means the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial report as a whole.
Requirements
Determining Materiality and Performance Materiality When Planning the Audit
When establishing the overall audit strategy, the auditor shall determine materiality for the financial report as a whole. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial report as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures. (Ref: Para. A3-A12)
The auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures. (Ref: Para. A13)
Revision as the Audit Progresses
The auditor shall revise materiality for the financial report as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially. (Ref: Para. A14)
If the auditor concludes that a lower materiality for the financial report as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate.
Documentation
The auditor shall include in the audit documentation the following amounts and the factors considered in their determination:[5]
Materiality for the financial report as a whole (see paragraph 10 of this Auditing Standard);
If applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures (see paragraph 10 of this Auditing Standard);
Performance materiality (see paragraph 11 of this Auditing Standard); and
Any revision of (a)-(c) as the audit progressed (see paragraphs 12-13 of this Auditing Standard).
* * *
Application and Other Explanatory Material
Materiality and Audit Risk (Ref: Para. 5)
In conducting an audit of a financial report, the overall objectives of the auditor are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial report, and communicate as required by the Australian Auditing Standards, in accordance with the auditor’s findings.[6] The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.[7] Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial report is materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.[8] Materiality and audit risk are considered throughout the audit, in particular, when:
Identifying and assessing the risks of material misstatement;[9]
Determining the nature, timing and extent of further audit procedures;[10] and
Evaluating the effect of uncorrected misstatements, if any, on the financial report[11] and in forming the opinion in the auditor’s report.[12]
Materiality in the Context of an Audit (Ref: Para. 6)
Identifying and assessing the risks of material misstatement involves the use of professional judgement to identify those classes of transactions, account balances and disclosures, including qualitative disclosures, the misstatement of which could be material (i.e., in general, misstatements are considered to be material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report as a whole). When considering whether misstatements in qualitative disclosures could be material, the auditor may identify relevant factors such as:
The circumstances of the entity for the period (for example, the entity may have undertaken a significant business combination during the period).
The applicable financial reporting framework, including changes therein (for example, a new financial reporting standard may require new qualitative disclosures that are significant to the entity).
Qualitative disclosures that are important to users of the financial report because of the nature of an entity (for example, liquidity risk disclosures may be important to users of the financial report for a financial institution).[13]
Determining Materiality and Performance Materiality When Planning the Audit
Considerations Specific to Public Sector Entities (Ref: Para. 10)
In the case of a public sector entity, legislators and regulators are often the primary users of its financial report. Furthermore, the financial report may be used to make decisions other than economic decisions. The determination of materiality for the financial report as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) in an audit of the financial report of a public sector entity is therefore influenced by law, regulation or other authority, and by the financial information needs of legislators and the public in relation to public sector programs.
Use of Benchmarks in Determining Materiality for the Financial Report as a Whole (Ref: Para. 10)
Determining materiality involves the exercise of professional judgement. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial report as a whole. Factors that may affect the identification of an appropriate benchmark include the following:
The elements of the financial report (for example, assets, liabilities, equity, revenue, expenses);
Whether there are items on which the attention of the users of the particular entity’s financial report tends to be focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
The nature of the entity, where the entity is in its life cycle, and the industry and economic environment in which the entity operates;
The entity’s ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings); and
The relative volatility of the benchmark.
Examples of benchmarks that may be appropriate, depending on the circumstances of the entity, include categories of reported income such as profit before tax, total revenue, gross profit and total expenses, total equity or net asset value. Profit before tax from continuing operations is often used for profit-oriented entities. When profit before tax from continuing operations is volatile, other benchmarks may be more appropriate, such as gross profit or total revenues.
In relation to the chosen benchmark, relevant financial data ordinarily includes prior periods’ financial results and financial positions, the period-to-date financial results and financial position, and budgets or forecasts for the current period, adjusted for significant changes in the circumstances of the entity (for example, a significant business acquisition) and relevant changes of conditions in the industry or economic environment in which the entity operates. For example, when, as a starting point, materiality for the financial report as a whole is determined for a particular entity based on a percentage of profit before tax from continuing operations, circumstances that give rise to an exceptional decrease or increase in such profit may lead the auditor to conclude that materiality for the financial report as a whole is more appropriately determined using a normalised profit before tax from continuing operations figure based on past results.
Materiality relates to the financial report on which the auditor is reporting. Where the financial report is prepared for a financial reporting period of more or less than twelve months, such as may be the case for a new entity or a change in the financial reporting period, materiality relates to the financial report prepared for that financial reporting period.
Determining a percentage to be applied to a chosen benchmark involves the exercise of professional judgement. There is a relationship between the percentage and the chosen benchmark, such that a percentage applied to profit before tax from continuing operations will normally be higher than a percentage applied to total revenue. For example, the auditor may consider five percent of profit before tax from continuing operations to be appropriate for a profit-oriented entity in a manufacturing industry, while the auditor may consider one percent of total revenues or total expenses to be appropriate for a not-for-profit entity. Higher or lower percentages, however, may be deemed appropriate in the circumstances.
Considerations Specific to Small Entities
When an entity’s profit before tax from continuing operations is consistently nominal, as might be the case for an owner-managed business where the owner takes much of the profit before tax in the form of remuneration, a benchmark such as profit before remuneration and tax may be more relevant.
Considerations Specific to Public Sector Entities
In an audit of a public sector entity, total cost or net cost (expenses less revenues or expenditure less receipts) may be appropriate benchmarks for program activities. Where a public sector entity has custody of public assets, assets may be an appropriate benchmark.
Materiality Level or Levels for Particular Classes of Transactions, Account Balances or Disclosures (Ref: Para. 10)
Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial report as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report include the following:
Whether law, regulation or the applicable financial reporting framework affect users’ expectations regarding the measurement or disclosure of certain items (for example, related party transactions the remuneration of management and those charged with governance, and sensitivity analysis for fair value accounting estimates with high estimation uncertainty).
The key disclosures in relation to the industry in which the entity operates (for example, research and development costs for a pharmaceutical company).
Whether attention is focused on a particular aspect of the entity’s business that is separately disclosed in the financial report (for example disclosures about segments or a significant business combination).
In considering whether, in the specific circumstances of the entity, such classes of transactions, account balances or disclosures exist, the auditor may find it useful to obtain an understanding of the views and expectations of those charged with governance and management.
Performance Materiality (Ref: Para. 11)
Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate of individually immaterial misstatements may cause the financial report to be materially misstated, and leaves no margin for possible undetected misstatements. Performance materiality (which, as defined, is one or more amounts) is set at less than materiality for the financial report as a whole to reduce aggregation risk to an appropriately low level. Similarly, performance materiality relating to a materiality level determined for a particular class of transactions, account balance or disclosure is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in that particular class of transactions, account balance or disclosure exceeds the materiality level for that particular class of transactions, account balance or disclosure. The determination of performance materiality is not a simple mechanical calculation and involves the exercise of professional judgement. It is affected by the auditor’s understanding of the entity, updated during the performance of the risk assessment procedures; and the nature and extent of misstatements identified in previous audits and thereby the auditor’s expectations in relation to misstatements in the current period.
Revision as the Audit Progresses (Ref: Para. 12)
Materiality for the financial report as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) may need to be revised as a result of a change in circumstances that occurred during the audit (for example, a decision to dispose of a major part of the entity’s business), new information, or a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures. For example, if during the audit it appears as though actual financial results are likely to be substantially different from the anticipated period end financial results that were used initially to determine materiality for the financial report as a whole, the auditor revises that materiality.
Materiality and Audit Risk (Ref: Para. 5
Materiality and Audit Risk (Ref: Para. 5)
Materiality and Audit Risk (Ref: Para. 5)
In conducting an audit of a financial report, the overall objectives of the auditor are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial report, and communicate as required by the Australian Auditing Standards, in accordance with the auditor’s findings.[6] The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.[7] Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial report is materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.[8] Materiality and audit risk are considered throughout the audit, in particular, when:
Identifying and assessing the risks of material misstatement;[9]
Determining the nature, timing and extent of further audit procedures;[10] and
Evaluating the effect of uncorrected misstatements, if any, on the financial report[11] and in forming the opinion in the auditor’s report.[12]
Materiality in the Context of an Audit (Ref: Para. 6)
Identifying and assessing the risks of material misstatement involves the use of professional judgement to identify those classes of transactions, account balances and disclosures, including qualitative disclosures, the misstatement of which could be material (i.e., in general, misstatements are considered to be material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report as a whole). When considering whether misstatements in qualitative disclosures could be material, the auditor may identify relevant factors such as:
The circumstances of the entity for the period (for example, the entity may have undertaken a significant business combination during the period).
The applicable financial reporting framework, including changes therein (for example, a new financial reporting standard may require new qualitative disclosures that are significant to the entity).
Qualitative disclosures that are important to users of the financial report because of the nature of an entity (for example, liquidity risk disclosures may be important to users of the financial report for a financial institution).[13]
Revision as the Audit Progresses (Ref: P
Revision as the Audit Progresses (Ref: Para. 12)
Revision as the Audit Progresses (Ref: Para. 12)
Materiality for the financial report as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) may need to be revised as a result of a change in circumstances that occurred during the audit (for example, a decision to dispose of a major part of the entity’s business), new information, or a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures. For example, if during the audit it appears as though actual financial results are likely to be substantially different from the anticipated period end financial results that were used initially to determine materiality for the financial report as a whole, the auditor revises that materiality.
Source text: opening excerpt
Sourced from the Federal Register of Legislation (legislation.gov.au), CC BY 4.0.
Obtaining a Copy of this Auditing Standa Obtaining a Copy of this Auditing Standard
Obtaining a Copy of this Auditing Standard
The most recently compiled versions of Auditing Standards, original Standards and amending Standards (see Compilation Details) are available on the AUASB website: www.auasb.gov.au
Contact Details Contact Details
Contact Details
Auditing and Assurance Standards BoardPhone: (03) 8080 7400E-mail: enquiries@auasb.gov.auPostal Address:PO Box 204Collins Street WestMelbourne Victoria 8007AUSTRALIA
Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au. Otherwise, no part of this Auditing Standard may be reproduced, stored or transmitted in any form or by any means without the prior written permission of the AUASB except as permitted by law.
This Auditing Standard reproduces substantial parts of the corresponding International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) and published by the International Federation of Accountants (IFAC), in the manner described in the statement on Conformity with International Standards on Auditing. The AUASB acknowledges that IFAC is the owner of copyright in the International Standard on Auditing incorporated in this Auditing Standard throughout the world.
All existing rights in this material are reserved outside Australia. Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only.
Further information and requests for authorisation to reproduce this Auditing Standard for commercial purposes outside Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to . Any decision to approve a request may also require the agreement of IFAC.
The Standard does not create statutory criminal penalties within its text. It is issued by the AUASB pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001 (Authority Statement). Compliance with the Standard forms part of the body of Australian Auditing Standards auditors are required to follow, and the Standard cross‑references ASA 101 (Preamble) and ASA 200 (Overall Objectives).
Main concepts
The Standard frames materiality and performance materiality as matters of professional judgement used throughout the audit process to plan procedures, assess risks and evaluate uncorrected misstatements. The key concepts are defined and used as follows.
Materiality: The Standard adopts the conventional financial reporting notion that misstatements, including omissions, are material if they could reasonably be expected to influence the economic decisions of users of the financial report (para. 6; Materiality in the Context of an Audit). The auditor’s determination of materiality is expressly a matter of professional judgement and is to be made in light of the common information needs of users as a group rather than the needs of specific individual users (para. 2; Requirements).
Performance materiality: Defined as the amount or amounts set by the auditor at less than materiality for the financial report as a whole to reduce aggregation risk to an appropriately low level (Definition; para. 11). Performance materiality may also apply to particular classes of transactions, account balances or disclosures. The Standard emphasises that performance materiality is not a simple mechanical calculation; it is influenced by the auditor’s understanding of the entity, results of risk assessment procedures and the nature and extent of misstatements identified in prior audits (para. A13).
Aggregation risk: Defined as the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial report as a whole (Definition). The existence of aggregation risk is the core reason for setting performance materiality below overall materiality.
Benchmarks and percentages: The Standard instructs auditors to select an appropriate benchmark as a basis for calculating materiality for the financial report as a whole, and to apply a percentage to that benchmark as a starting point (para. A10). Examples of possible benchmarks include profit before tax, total revenue, gross profit, total expenses, total equity or net asset value, and the choice depends on entity type, industry, financial information users’ focus, volatility of the benchmark and the entity’s life cycle or financing structure (paras. A10-A10.4).
Particular materiality levels: The Standard requires consideration of whether particular classes of transactions, account balances or disclosures warrant lower materiality thresholds because of law, regulation, user focus or the nature of the item (para. 10; A11). Examples include related party transactions, management remuneration disclosures, and sensitivity analyses for fair value accounting estimates with high estimation uncertainty (A11).
Application across entity types: The Standard contains specific guidance for public sector entities, noting that legislators and regulators may be primary users and that non‑economic decisions may be made using the financial report; appropriate benchmarks for public sector audits may include total cost, net cost or assets, depending on context (A10.1, A10.3). For small or owner‑managed businesses where profit before tax is nominal, the Standard suggests alternative benchmarks, such as profit before remuneration and tax (A10.2).
Documentation and revision: The Standard makes documentation mandatory for materiality, any particular materiality levels, performance materiality, and any revisions during the audit (para. 14). It requires auditors to revise initial materiality determinations when information arises that would have caused a different initial figure, and to reconsider performance materiality and the nature, timing and extent of further procedures if materiality is revised downward (paras. 12-13).
Relationship with audit risk: The explanatory material ties materiality into the auditor’s overall objective of obtaining reasonable assurance and reducing audit risk to an acceptably low level. Materiality affects identification and assessment of risks of material misstatement, determination of further audit procedures, and evaluation of uncorrected misstatements in forming the auditor’s opinion (para. A1).
Conformity: The Standard conforms with the IAASB’s ISA 320, and the compilation indicates which paragraphs are AUASB additions (Authority Statement). The Standard is to be read with ASA 101 and ASA 200 which set out the preamble and overall objectives of auditors working under Australian Auditing Standards.
Who it affects
The Standard names its direct audience and identifies situations where its requirements apply. Primary affected parties are:
Auditors of financial reports: The Standard’s requirements apply to auditors conducting audits of financial reports for financial years and half‑years under the Corporations Act 2001, and to audits of financial reports or complete sets of financial statements for other purposes (Aus 0.1). The obligations to determine materiality, set performance materiality, revise those determinations and document the factors considered (paras. 10-14) fall directly on auditors.
Entities being audited: Entities whose financial reports are the subject of audits are affected because the auditor’s materiality judgements drive the nature, timing and extent of audit procedures (para. 5, para. 10). Materiality choices influence the level of testing, the focus of substantive procedures and the auditor’s evaluation of misstatements. Entities prepared to disclose particular classes of transactions may see higher scrutiny if auditors set lower specific materiality levels for those items (para. A11).
Users of financial reports: While users are not regulated by this Standard, the Standard is explicitly grounded in the financial information needs of users as a group. The auditor’s materiality determinations are made on the assumption users have reasonable knowledge of business and accounting and make reasonable economic decisions (para. 2). The Standard notes that the auditor assumes users accept uncertainty and that the financial report is prepared and audited to levels of materiality (para. 2.1-2.4).
Those charged with governance and management: The Standard contemplates that auditors may obtain an understanding of the views and expectations of those charged with governance and management when identifying classes of transactions, account balances or disclosures that might require particular materiality levels (para. A11.2). Management decisions that alter benchmarks or significant transactions during the period can change materiality, prompting revision (paras. 12-13).
Public sector entities and legislators/regulators: The Standard contains specific guidance for public sector audits, recognising that legislators and regulators may be primary users and that financial reports may be used for non‑economic decisions; appropriate benchmarks for program activities may include total cost, net cost or assets (A10.1, A10.3). This affects auditors of government entities and the scope of work they may plan.
Small entities and owner‑managed businesses: The Standard recognises that commonly used benchmarks such as profit before tax may be inappropriate for entities where profit before tax is consistently nominal. It directly advises alternative benchmarks such as profit before remuneration and tax in such circumstances (A10.2).
Indirectly affected parties include regulators and standard users: The Standard was issued under statutory powers in the ASIC Act and the Corporations Act (Authority Statement), and is part of the suite of Australian Auditing Standards regulators use to assess audit quality. Audit firms’ quality control functions and audit committees will be affected operationally because materiality determinations are central to audit planning and documentation (paras. 10-14). Firms need to embed the Standard’s requirements in methodology, templates and review processes to ensure documentation and revision obligations are met.
The Standard does not itself create penalties against any of these parties. It creates obligations for auditors as professional duties within the AUASB framework; failure to comply could be relevant in regulatory or disciplinary contexts. The compilation also applies to audits of other historical financial information as appropriate (Aus 0.2).
Key duties and rights
This Standard imposes specific duties on auditors and sets out their scope of professional judgement. It does not confer private rights or statutory enforcement remedies within its own text. The main duties are:
Determine materiality at planning stage: The auditor must determine materiality for the financial report as a whole when establishing the overall audit strategy (para. 10.1). If particular classes of transactions, account balances or disclosures warrant lower thresholds, the auditor must determine those materiality levels for those classes as well (para. 10.1; refs A3-A12).
Determine performance materiality: The auditor must determine performance materiality for purposes of assessing the risks of material misstatement and for determining the nature, timing and extent of further audit procedures (para. 11.1). The Standard emphasises performance materiality as a tool to reduce aggregation risk (Definition; A13).
Revise materiality when warranted: The auditor must revise materiality for the financial report as a whole, and any particular class materiality levels, if during the audit the auditor becomes aware of information that would have led to a different initial determination (para. 12.1). If the auditor concludes that a lower materiality is appropriate, they must determine whether to revise performance materiality and whether further audit procedures remain appropriate (para. 12.2).
Document determinations and revisions: The auditor must document materiality for the financial report as a whole, any particular materiality levels, performance materiality and any revisions, along with the factors considered in their determination (para. 14.1(a)-(d)). The documentation requirement is precise and mandatory within the Standard.
Apply professional judgement: The Standard repeatedly states that determination of materiality is a matter of professional judgement (para. 2; A10). The auditor is to assume users have reasonable accounting and business knowledge and make reasonable economic decisions (para. 2.1-2.4). The Standard directs auditors to consider both quantitative and qualitative factors, and the specific circumstances of misstatements, when planning and evaluating the audit (para. 5; A2).
Plan audit procedures in light of materiality: The initial materiality determinations provide the basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing risks of material misstatement and the nature, timing and extent of further audit procedures (para. 5.4).
Rights and constraints implied by the Standard: The Standard does not legislate rights in favour of any private party. It sets obligations for auditors that may be used as an objective benchmark by regulators, disciplinary bodies and courts when assessing audit work. The compilation states that compliance with this Auditing Standard enables compliance with ISA 320 (Authority Statement). Auditors are required to read ASA 320 with ASA 101 and ASA 200, which set out how AUASB Standards are to be understood and the overall objectives of the auditor (Authority Statement).
No new statutory enforcement provisions are created by this Standard. The authority statement records the AUASB made the Standard pursuant to s 227B of the ASIC Act and s 336 of the Corporations Act (Authority Statement). The duties set out are professional standards obligations that become part of the Australian Auditing Standards framework auditors must follow.
Penalties and enforcement
The text of this compiled Standard itself does not create or specify criminal, civil or administrative penalties for non‑compliance. The instrument is an Auditing Standard issued by the AUASB; its effect is to impose professional obligations on auditors and to provide criteria against which audit quality and conduct may be assessed. The Standard states it was made pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001 (Authority Statement). Those statutory references identify the AUASB’s power to make standards rather than specifying enforcement mechanisms within ASA 320.
Practical enforcement pathways that follow from the Standard’s place in the regulatory framework include the following, as indicated by the compilation and authority text:
Regulatory oversight and disciplinary processes: Because the Standard forms part of the Australian Auditing Standards, non‑compliance may be relevant to ASIC or professional disciplinary bodies when assessing auditor conduct under the Corporations Act and other regulatory arrangements. The Standard does not set the procedures for investigations, sanctions or remedies; those are governed by statutes and professional rules external to the Standard.
Firm quality control and litigation risk: Audit firms are required by their own quality control systems and by other Auditing Standards (for example ASA 220, ASA 230 and ASA 240 are referenced elsewhere) to comply with auditing standards. Failure to follow ASA 320’s documentation and planning requirements (paras. 10-14) would be a compliance failure within a firm quality review and may be relied on in professional negligence claims, but the Standard itself does not prescribe civil remedies or damages.
Use as evidentiary benchmark: The Standard’s mandatory wording (use of “shall” in paras. 10-14) and documentation requirement (para. 14) create a clear benchmark that regulators, courts and tribunals can use when examining the sufficiency of audit planning, materiality judgements and audit evidence. The compilation states compliance enables compliance with ISA 320 (Authority Statement). How external bodies act on instances of non‑compliance depends on their own statutory powers and procedural rules, not on ASA 320’s text.
It is important to note the Standard’s own scope: it imposes duties on auditors in respect of materiality and documentation but leaves sanctioning mechanisms and enforcement processes to the broader regulatory and legal framework. The Standard provides criteria and binding professional obligations; consequences for breach arise from external statutes, professional codes and potential civil liability, none of which are elaborated within this document.
How it interacts with other laws
The compilation explicitly situates ASA 320 within the broader statutory and standards architecture. Interactions described in the text include:
Statutory basis for the Standard: ASA 320 was made by the AUASB pursuant to s 227B of the Australian Securities and Investments Commission Act 2001 and s 336 of the Corporations Act 2001 (Authority Statement). Those references indicate the AUASB’s statutory authority to issue auditing standards applicable to audits under the Corporations Act. The Standard itself does not restate the substantive provisions of those laws, but its application to audits under the Corporations Act is explicit in Aus 0.1.
Reading with other AUASB Standards: The Authority Statement directs readers that ASA 320 is to be read in conjunction with ASA 101 Preamble to AUASB Standards and ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards (Authority Statement). Those cross‑references indicate that materiality determinations must be made within the general principles and definitions set out in the preamble and within the auditor’s overall objectives, including risk assessment, professional scepticism and reasonable assurance.
Conformity with international standards: The compilation states ASA 320 conforms with ISA 320 issued by the IAASB and that paragraphs added by the AUASB are identified with the prefix “Aus” (Authority Statement). Compliance with ASA 320 enables compliance with ISA 320. This alignment means auditors following ASA 320 will generally meet international expectations on materiality, but AUASB‑added material may reflect Australian‑specific practice and must be observed.
Interaction with the Corporations Act audit regime: Aus 0.1 specifically applies the Standard to audits of financial reports for financial years and half‑years under the Corporations Act. That indicates ASA 320’s requirements are directly relevant to statutory audits required by the Corporations Act, including those that form part of the financial reporting obligations of companies. However, the Standard does not modify statutory obligations; it guides how auditors fulfil their professional responsibilities under the existing law.
Relation to professional liability and evidence law: While ASA 320 does not address civil law consequences directly, its documentation and planning requirements (para. 14; paras. 10-13) create a contemporaneous record auditors should produce to substantiate the exercise of professional judgement. Such records interact procedurally with discovery and evidentiary processes in civil litigation and regulatory investigations, although the Standard does not prescribe how those legal processes operate.
Interaction with sectoral rules: The Standard provides guidance specific to public sector entities (A10.1, A10.3) and small entities (A10.2). For public sector audits, auditors must consider that users may include legislators and regulators and that financial reports may be used for non‑economic decisions; the determination of materiality is therefore influenced by law, regulation or other authority (A10.1). The Standard does not itself change public sector law but instructs auditors how to account for the legal and accountability environment when setting materiality.
Intellectual property and reproduction rights: The compilation includes a copyright and reproduction statement. It reproduces substantial parts of the corresponding ISA with acknowledgement of IFAC copyright and sets out reproduction permissions, particularly for non‑commercial use within Australia, and procedures to request commercial reproduction (Copyright section). That interacts with broader copyright law but is self‑contained regarding authorised use of the Standard text.
In sum, ASA 320 is a professional standard grounded in statutory authorisation, designed to be applied alongside other AUASB Standards and within the statutory audit landscape under the Corporations Act. It influences and informs auditors’ compliance with legal audit requirements, their documentation and the evidence they produce, and it is consistent with relevant international standards while including Australian‑specific additions.
Amendment history
The compiled ASA 320 provided contains a chronological record of the Standard’s original issuance and subsequent amending Standards up to 27 April 2022. The compilation details and table entries in the document are the source for the amendment history. Key dates and entries are:
Original Standard:
ASA 320 (as originally made): 27 October 2009. Operative for financial reporting periods commencing on or after 1 January 2010. The compilation records registration of ASA 320 with Registration Number F2009L04080, Registration Date 12 November 2009, and Commencement Date 13 November 2009 (Compilation Details; Legislation History).
Amendments incorporated in the compilation:
ASA 2011‑1: Date made 27 June 2011, operative for financial reporting periods commencing on or after 1 July 2011. Registered as F2011L01379; Registration Date 30 June 2011; Commencement Date 1 July 2011. The Table of Amendments records the Title Page amended by ASA 2011‑1 [31] (Compilation Details; Table of Standards; Table of Amendments).
ASA 2015‑1: Date made 1 December 2015, operative for financial reporting periods ending on or after 15 December 2016. Registered as F2015L02032; Registration Date 16 December 2015; Commencement Date 17 December 2015. Multiple paragraph amendments and additions are recorded in the Table of Amendments, including amendments to paragraph 6, additions of footnotes, deletions of Aus A1.1 and Aus A10.1, additions and amendments to application material (ASA 2015‑1 [101]-[109], see Table of Amendments).
ASA 2020‑1: Date made 3 March 2020, operative for financial reporting periods commencing on or after 15 December 2021. Registered as F2020L00252; Registration Date 13 March 2020; Commencement Date 14 December 2021. The Table of Amendments notes amendments to footnote 3 and footnote 13 by ASA 2020‑1 [67] and [68] respectively (Compilation Details; Table of Amendments).
ASA 2022‑1: Date made 27 April 2022, operative for financial reporting periods commencing on or after 15 December 2023. Registered as F2022L00712; Registration Date 19 May 2022; Commencement Date 14 December 2023. Table of Amendments identifies amendments to paragraph 9 and to A13 by ASA 2022‑1 [30] and [31] respectively (Compilation Details; Table of Amendments).
Compilation date and scope:
This compilation was prepared on 1 March 2023 and takes into account amendments made up to and including 27 April 2022 (Compilation Details). The compilation makes clear it is a representation of ASA 320 as amended and is not a separate Auditing Standard (Compilation Details; first paragraph).
Table of Amendments specifics:
The compilation includes a Table of Amendments listing which paragraphs were affected and by which amending Standards, with square‑bracket references to the paragraphs of the amending Standards (Table of Amendments). Items amended include the Title Page, paragraph 6, several footnotes, Aus A1.1 and Aus A10.1 deletions, additions to application material, and changes to definitions and explanatory material.
Legislation history entries:
The Legislation History table supplies registration numbers, registration dates and commencement dates for ASA 320 and each amending standard (Compilation Details).
Practical implication of the amendment history:
The compilation makes clear which parts of the Standard are AUASB additions (prefix “Aus”) and which conform to ISA 320, and records the amending standards and operative dates auditors must observe. For audits covering financial reporting periods overlapping amendment operative dates, auditors must apply the operative version applicable to the reporting period (Aus 0.3; Compilation Details). The Standard’s Compilation Details and Table of Standards make the operative date for each amending Standard explicit.
The compilation also includes copyright and reproduction instructions and acknowledges IFAC copyright in the corresponding ISA, which are part of the Standard’s administrative history and constraints on distribution (Copyright section).
Litigation history
The compiled Standard contains no internal references to litigation, case law, judicial decisions, or precedent. The text does not name any cases and does not cite any judicial authority. The content is limited to the Standard’s operative requirements, explanations and the AUASB’s compilation and amendment history. The Authority Statement confirms the Standard conforms with ISA 320 and that AUASB‑added paragraphs are identified by “Aus” (Authority Statement), but the Standard itself does not include instances of litigation involving its provisions.
Consequences and evidential use in litigation, however, can be inferred from the Standard’s role in the regulatory framework. Because the Standard sets mandatory requirements for auditors (use of “shall” in paras. 10-14) and requires documentation (para. 14), auditors’ compliance or non‑compliance with ASA 320 can be used as evidence in legal or regulatory proceedings concerning audit quality, negligence or regulatory breaches. The Standard provides concrete benchmarks and obligations that external bodies, tribunals or courts may consider when examining auditors’ conduct, but any litigation history or judicial interpretation would be external to the Standard and is not recorded in this text.
Given the absence of judicial references in the compilation, practitioners seeking litigation precedent that applies ASA 320 should consult court decisions, regulator determinations or professional disciplinary records outside this document. The Standard itself contains no litigation history section and does not identify any litigated matters.
Gotchas
This section highlights traps and points of uncertainty the Standard identifies or that arise directly from its text. Each point is grounded in the Standard’s paragraphs and explanatory material.
Materiality is judgement heavy: The Standard repeatedly states that materiality is a matter of professional judgement (para. 2; A10). There is no prescriptive formula or fixed percentage. Audit files that attempt to substitute mechanistic calculations for considered judgement (for example simply applying a fixed percentage without documenting why a benchmark was chosen) will not meet the Standard’s requirements. The Standard provides benchmarks and example percentages as starting points, not mandatory rules (para. A10.4).
Performance materiality is not a simple mechanical reduction: The Standard cautions that performance materiality is “not a simple mechanical calculation” and is influenced by the auditor’s understanding, prior misstatements and updated risk assessments (para. A13). A common mistaken practice is to apply a rote percentage cut (for example, take 70% of overall materiality) without documenting the factors that justify that choice. The Standard’s documentation requirement (para. 14) makes that lack of reasoning visible.
Lower thresholds for particular classes: Auditors must identify classes of transactions, balances or disclosures for which lower materiality levels are appropriate (para. 10.1; A11). A “gotcha” is failing to identify such classes where users, law or industry focus demand it. Examples include related party transactions and disclosure items central to the industry. If an auditor overlooks such classes and later finds misstatements in those areas, the auditor may be exposed to critique because the planning stage should have recognised such risks.
Materiality does not eliminate qualitative assessment of misstatements: The Standard warns that some misstatements may be material even if quantitatively below the threshold, because of their nature or circumstances (para. 5; A2). An overreliance on quantitative thresholds without considering the nature of items, disclosure sensitivity or legal/regulatory attention is inconsistent with the Standard.
Revision obligations during the audit: The auditor must revise materiality if new information would have led to a different initial amount (para. 12.1). A practical pitfall is failing to revisit initial materiality when significant transactions or events occur during the audit period, such as a major disposal or a substantial variance from expected results. If the auditor continues with procedures based on an out‑of‑date materiality level, the audit may not achieve its objectives.
Documentation specifics: The Standard requires documenting materiality for the financial report as a whole, any particular materiality levels for classes, performance materiality and any revisions along with the factors considered (para. 14.1(a)-(d)). Generic or cursory documentation will not satisfy this requirement. Auditors must capture the financial data considered, benchmark selection rationale, percentage applied, and reasons for any adjustments or revisions.
Public sector and non‑economic users: For public sector entities, legislators and regulators may be primary users and financial reports may be used for non‑economic decisions; materiality should reflect law, regulation and public accountability (A10.1). Auditors accustomed to profit‑oriented benchmarks can err if they do not account for different user needs or appropriate benchmarks such as total cost or assets.
Benchmarks and volatility: The Standard notes that when profit before tax is volatile, other benchmarks may be more appropriate (A10.1). Practitioners must not default to profit before tax where volatility or exceptional items distort its usefulness; failure to normalise or choose a suitable benchmark is a common deficiency.
Aggregation risk and sample testing: Performance materiality is explicitly intended to lower aggregation risk (Definition; A13). A potential pitfall is designing tests that, when aggregated across multiple accounts, leave a material aggregation risk even though each account’s testing met its individual threshold. Planning should consider cumulative detection and sampling design.
Applicability to other historical financial information: Although Aus 0.1 extends the Standard’s application to audits of other historical financial information “as appropriate,” auditors must assess applicability and adapt materiality judgements where the engagement is not a statutory audit (Aus 0.1-0.2). Treating non‑statutory engagements as identical to statutory audits without documenting adaptations may be problematic.
Conformity with ISA and AUASB additions: The compilation includes AUASB‑added paragraphs identified by “Aus.” Practitioners should ensure they apply those Australian additions , for example Aus 0.1-0.3 , in addition to ISA text, rather than relying solely on the ISA as authoritative.
Copyright and reproduction limits: Practical firms reproducing the Standard must observe the copyright notices and reproduction permissions stated in the compilation, especially if distributing the Standard commercially or outside Australia (Copyright section).
How to comply
This section sets out concrete steps auditors and audit firms should take to comply with ASA 320 as compiled, grounded in the Standard’s mandatory requirements and application material.
Establish materiality at the planning/strategy stage
At the point of establishing the overall audit strategy, determine materiality for the financial report as a whole (para. 10.1). Record the chosen benchmark, the percentage applied, and the financial data used (prior periods, period‑to‑date results, budgets/forecasts, normalisation adjustments) with the rationale (para. A10.2).
Where the entity is profit‑oriented, consider profit before tax from continuing operations as a common benchmark; if volatile, consider alternative benchmarks such as gross profit or total revenues (A10.1-A10.4).
For small or owner‑managed entities with nominal profit before tax, consider profit before remuneration and tax (A10.2).
For public sector or program audits, consider total cost, net cost or assets as appropriate (A10.1, A10.3).
Identify and set materiality levels for particular classes
Assess whether particular classes of transactions, account balances or disclosures warrant lower materiality levels because of law, regulation, industry practice or user expectations (para. 10.1; A11). Examples include related party transactions, management remuneration, segment disclosures, research and development expense, or fair value sensitivity disclosures.
Engage with those charged with governance and management to understand focus areas that might require lower thresholds (A11.2).
Determine performance materiality
Set performance materiality at one or more amounts below overall materiality to reduce aggregation risk (Definition; para. 11; A13).
Document the rationale for the percentage or method used to derive performance materiality, including considerations of prior misstatements, control environment, and the auditor’s updated understanding of the entity (A13).
Design nature, timing and extent of procedures in light of materiality
Use materiality and performance materiality to determine the nature, timing and extent of risk assessment procedures and further audit procedures (para. 5; para. 10.4).
Ensure sampling and substantive procedures are designed with aggregation risk in mind so that the aggregate of undetected misstatements is reduced to an appropriately low level (A13).
Continuous re‑assessment and revision
Implement checkpoints during fieldwork to reassess whether new information would have led to a different initial materiality determination (para. 12.1; A14). Examples of triggers: unexpected variances, subsequent events, large transactions or a decision to dispose of a major part of the business.
If revising materiality downward, determine whether to revise performance materiality and whether further or modified procedures are necessary (para. 12.2). Document any changes and the reasons.
Documentation
Comply with para. 14 by including in audit documentation: materiality for the financial report as a whole; materiality levels for particular classes where applicable; performance materiality; and any revisions and the factors considered. Ensure documentation includes the benchmark selection, percentages applied and normalisation adjustments.
Maintain contemporaneous working papers that explain qualitative considerations for materiality and why certain items below the numeric threshold may nonetheless be treated as material due to their nature (paras. 5; A2).
Tailor approach for public sector and small entities
For audits of public sector entities, explicitly consider the needs of legislators, regulators and the public, and whether non‑economic decisions use the financial report, when choosing benchmarks and materiality levels (A10.1).
For small or owner‑managed entities, adopt alternative benchmarks such as profit before remuneration and tax where profit before tax is not meaningful (A10.2).
Embed ASA 320 in firm methodology and training
Update audit methodology and templates to capture the required materiality and performance materiality documentation fields (para. 14).
Train engagement teams on qualitative indicators that can make small misstatements material by nature, aggregation risk concepts, and the need to revise materiality during the audit (paras. 5; A13; A14).
Ensure reviewers check that the auditor’s judgement is explained, not only the numeric outcome.
Cross‑reference other AUASB Standards
Apply ASA 320 in conjunction with ASA 101 and ASA 200 as required by the Authority Statement. Ensure materiality considerations are consistent with the auditor’s overall objectives and the preamble’s interpretative guidance.
Observe copyright and reproduction rules
When distributing copies of the Standard within the firm or to clients, observe AUASB/IFAC reproduction requirements in the Copyright section. For commercial reproduction or distribution outside Australia follow the contact procedures.
Following these steps will align audit planning and execution with the mandatory requirements of ASA 320, ensure documentation meets para. 14 and reduce risk that materiality judgements are criticised as arbitrary or inadequately evidenced.
Materiality and Audit Risk.....................................................A1
Materiality in the Context of an Audit.............................................A2
Determining Materiality and Performance Materiality When Planning the Audit..........A3-A13
Revision as the Audit Progresses................................................A14
COMPILATION DETAILS COMPILATION DETAILS
Obtaining a Copy of this Auditing Standard
The most recently compiled versions of Auditing Standards, original Standards and amending Standards (see Compilation Details) are available on the AUASB website: www.auasb.gov.au
Contact Details
Auditing and Assurance Standards BoardPhone: (03) 8080 7400E-mail: enquiries@auasb.gov.auPostal Address:PO Box 204Collins Street WestMelbourne Victoria 8007AUSTRALIA
Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au. Otherwise, no part of this Auditing Standard may be reproduced, stored or transmitted in any form or by any means without the prior written permission of the AUASB except as permitted by law.
This Auditing Standard reproduces substantial parts of the corresponding International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) and published by the International Federation of Accountants (IFAC), in the manner described in the statement on Conformity with International Standards on Auditing. The AUASB acknowledges that IFAC is the owner of copyright in the International Standard on Auditing incorporated in this Auditing Standard throughout the world.
All existing rights in this material are reserved outside Australia. Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only.
Further information and requests for authorisation to reproduce this Auditing Standard for commercial purposes outside Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au. Any decision to approve a request may also require the agreement of IFAC.
ISSN 1833-4393
CONTENTS
COMPILATION DETAILS
AUTHORITY STATEMENT
CONFORMITY WITH INTERNATIONAL STANDARDS ON AUDITING
Materiality and Audit Risk.....................................................A1
Materiality in the Context of an Audit.............................................A2
Determining Materiality and Performance Materiality When Planning the Audit..........A3-A13
Revision as the Audit Progresses................................................A14
COMPILATION DETAILS
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as Amended)
This compilation takes into account amendments made up to and including 27 April 2022 and was prepared on 1 March 2023 by the Auditing and Assurance Standards Board (AUASB).
This compilation is not a separate Auditing Standard made by the AUASB. Instead, it is a representation of ASA 320 (October 2009) as amended by other Auditing Standards which are listed in the Table below.
Table of Standards
Standard
Date made
Operative Date
ASA 320 [A]
27 October 2009
Financial reporting periods commencing on or after 1 January 2010
ASA 2011‑1 [B]
27 June 2011
Financial reporting periods commencing on or after 1 July 2011
ASA 2015‑1 [C]
1 December 2015
Financial reporting periods ending on or after 15 December 2016
ASA 2020‑1 [D]
3 March 2020
Financial reporting periods commencing on or after 15 December 2021[*]
ASA 2022-1 [E]
27 April 2022
Financial reporting periods commencing on or after 15 December 2023
Legislation History
Standard
Registration Number
Registration Date
Commencement Date
ASA 320
F2009L04080
12 November 2009
13 November 2009
ASA 2011‑1
F2011L01379
30 June 2011
1 July 2011
ASA 2015-1
F2015L02032
16 December 2015
17 December 2015
ASA 2020-1
F2020L00252
13 March 2020
14 December 2021
ASA 2022-1
F2022L00712
19 May 2022
14 December 2023
Table of Amendments
Paragraph affected
How affected
By … [paragraph]
Title Page
Amended
ASA 2011-1 [31]
6
Amended
ASA 2015-1 [101]
Footnotes 3 and 4
Addition
ASA 2015-1 [102]
Aus A1.1 and related footnote *
Deleted
ASA 2015-1 [103]
Heading after paragraph A1
Addition
ASA 2015-1 [104]
A2
Addition
ASA 2015-1 [105 and 107]
Footnote 13
Addition
ASA 2015-1 [106]
A11
Amended
ASA 2015-1 [108]
Aus A10.1 and related footnote *
Deleted
ASA 2015-1 [109]
Footnote 3
Amended
ASA 2020-1 [67]
Footnote 13
Amended
ASA 2020-1 [68]
9
Amended
ASA 2022-1 [30]
A13
Amended
ASA 2022-1 [31]
AUTHORITY STATEMENT
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as amended to 27 April 2022) is set out in paragraphs Aus 0.1 to A14.
This Auditing Standard is to be read in conjunction with ASA 101 Preamble to AUASB Standards, which sets out how AUASB Standards are to be understood, interpreted and applied. This Auditing Standard is to be read also in conjunction with ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards.
Conformity with International Standards on Auditing
This Auditing Standard conforms with International Standard on Auditing ISA 320 Materiality in Planning and Performing an Audit issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard‑setting board of the International Federation of Accountants (IFAC).
Paragraphs that have been added to this Auditing Standard (and do not appear in the text of the equivalent ISA) are identified with the prefix “Aus”.
Compliance with this Auditing Standard enables compliance with ISA 320.
Auditing Standard ASA 320 Materiality in Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as Amended)
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as Amended)
This compilation takes into account amendments made up to and including 27 April 2022 and was prepared on 1 March 2023 by the Auditing and Assurance Standards Board (AUASB).
This compilation is not a separate Auditing Standard made by the AUASB. Instead, it is a representation of ASA 320 (October 2009) as amended by other Auditing Standards which are listed in the Table below.
Table of Standards Table of Standards
Table of Standards
Standard
Date made
Operative Date
ASA 320 [A]
27 October 2009
Financial reporting periods commencing on or after 1 January 2010
ASA 2011‑1 [B]
27 June 2011
Financial reporting periods commencing on or after 1 July 2011
ASA 2015‑1 [C]
1 December 2015
Financial reporting periods ending on or after 15 December 2016
ASA 2020‑1 [D]
3 March 2020
Financial reporting periods commencing on or after 15 December 2021[*]
ASA 2022-1 [E]
27 April 2022
Financial reporting periods commencing on or after 15 December 2023
Legislation History
Standard
Registration Number
Registration Date
Commencement Date
ASA 320
F2009L04080
12 November 2009
13 November 2009
ASA 2011‑1
F2011L01379
30 June 2011
1 July 2011
ASA 2015-1
F2015L02032
16 December 2015
17 December 2015
ASA 2020-1
F2020L00252
13 March 2020
14 December 2021
ASA 2022-1
F2022L00712
19 May 2022
14 December 2023
Table of Amendments Table of Amendments
Table of Amendments
Paragraph affected
How affected
By … [paragraph]
Title Page
Amended
ASA 2011-1 [31]
6
Amended
ASA 2015-1 [101]
Footnotes 3 and 4
Addition
ASA 2015-1 [102]
Aus A1.1 and related footnote *
Deleted
ASA 2015-1 [103]
Heading after paragraph A1
Addition
ASA 2015-1 [104]
A2
Addition
ASA 2015-1 [105 and 107]
Footnote 13
Addition
ASA 2015-1 [106]
A11
Amended
ASA 2015-1 [108]
Aus A10.1 and related footnote *
Deleted
ASA 2015-1 [109]
Footnote 3
Amended
ASA 2020-1 [67]
Footnote 13
Amended
ASA 2020-1 [68]
9
Amended
ASA 2022-1 [30]
A13
Amended
ASA 2022-1 [31]
AUTHORITY STATEMENT
Auditing Standard ASA 320 Materiality in Planning and Performing an Audit (as amended to 27 April 2022) is set out in paragraphs Aus 0.1 to A14.
This Auditing Standard is to be read
This is an opening excerpt, not the complete document.