Materiality and Audit Risk (Ref: Para. 5Materiality and Audit Risk (Ref: Para. 5)

Materiality and Audit Risk (Ref: Para. 5)

1. 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:
   1. Identifying and assessing the risks of material misstatement;[9]
   2. Determining the nature, timing and extent of further audit procedures;[10] and
   3. 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)

1. 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).