Materiality (Ref: Para. 21‑23)Materiality (Ref: Para. 21‑23)

Materiality (Ref: Para. 21‑23)

1. The auditor is required:[21]
   1. When establishing the overall audit strategy, to determine:
      1. Materiality for the financial report as a whole; and
      2. If, in the specific circumstances of the entity, there are 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 materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures; and
   2. To determine performance materiality.

In the context of a group audit, materiality is established for both the group financial report as a whole, and for the financial information of the components. Materiality for the group financial report as a whole is used when establishing the overall group audit strategy.

1. To reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the group financial report exceeds materiality for the group financial report as a whole, component materiality is set lower than materiality for the group financial report as a whole. Different component materiality may be established for different components. Component materiality need not be an arithmetical portion of materiality for the group financial report as a whole and, consequently, the aggregate of component materiality for the different components may exceed the materiality for the group financial report as a whole. Component materiality is used when establishing the overall audit strategy for a component.
2. Component materiality is determined for those components whose financial information will be audited or reviewed as part of the group audit in accordance with paragraphs 26, 27(a) and 29. Component materiality is used by the component auditor to evaluate whether uncorrected detected misstatements are material, individually or in the aggregate.
3. A threshold for misstatements is determined in addition to component materiality. Misstatements identified in the financial information of the component that are above the threshold for misstatements are communicated to the group engagement team.
4. In the case of an audit of the financial information of a component, the component auditor (or group engagement team) determines performance materiality at the component level. This is necessary to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the financial information of the component exceeds component materiality. In practice, the group engagement team may set component materiality at this lower level. Where this is the case, the component auditor uses component materiality for purposes of assessing the risks of material misstatement of the financial information of the component and to design further audit procedures in response to assessed risks as well as for evaluating whether detected misstatements are material individually or in the aggregate.