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ISA 320

ISA 320. AUDIT MATERIALITY. ISA 320 - AUDIT MATERIALITY. INTRODUCTION : The auditor should consider materiality and its relationship with audit risk when conducting the audit. ISA 320 - AUDIT MATERIALITY. Materiality as defined by the IASB:

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ISA 320

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  1. ISA 320 AUDIT MATERIALITY ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  2. ISA 320 - AUDIT MATERIALITY INTRODUCTION: The auditor should consider materiality and its relationship with audit risk when conducting the audit. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  3. ISA 320 - AUDIT MATERIALITY Materiality as defined by the IASB: “Information is material if its omission or misstatement could influence the economicdecisions of users taken on the basis of thefinancial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather being a primary qualitative characteristic which information must have if it is to be useful”. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  4. ISA 320 - AUDIT MATERIALITY The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all materialrespects, in accordance with an applicable financial reporting framework. The assessment of what is material is a matter of professional judgment. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  5. ISA 320 - AUDIT MATERIALITY When should materiality be considered by the auditor? • When determining the nature, timing and extent of audit procedures. And • When evaluating the effect of misstatements ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  6. ISA 320 -AUDIT MATERIALITY The relationship between materiality and audit risk. The relationship is an inverse relationship – the higher the materiality level, the lower the audit risk …and vice versa. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  7. ISA 320 - AUDIT MATERIALITY If, after planning for audit procedures, the auditor determines that the acceptable materiality is lower, audit risk is, of course increased. How would he compensate for this? ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  8. ISA 320 - AUDIT MATERIALITY • The auditor would reduce the assessed risk of material misstatement, where this is possible, and support the reduced level by carrying out extended or additionaltests of control; or • Reduce detection risk by modifying the nature, timing and extent of planned substantive procedures. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  9. ISA 320 - AUDIT MATERIALITY Materiality and Audit Risk in Evaluating Audit Evidence The auditor’s assessment of materiality and audit risk may be different at the time of initially planning the engagement from the time of evaluating the results of audit procedures. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  10. ISA 320 - AUDIT MATERIALITY Evaluating the Effects of Misstatements The auditor should assess whether the aggregate of uncorrected misstatements that have been identified during the audit is material. What do the aggregate of uncorrected misstatements comprises? ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  11. ISA 320 - AUDIT MATERIALITY The aggregate of uncorrected misstatements comprises: • Specific misstatements identified by the auditor including the net effect of uncorrected misstatements that have been identified during the audit of previous periods; AHD • The auditor’s best estimate of other misstatements which cannot be specifically identified (i.e. projected errors). WHAT IF THE AGGREGATE UNCORRECTED MISSTATEMENTS IS MATERIAL? ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  12. ISA 320 - AUDIT MATERIALITY The auditor needs to consider reducing audit risk by extending audit procedures or requesting management to adjust the financial statements. Management may want to adjust the financial statements for the misstatements identified ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  13. ISA 320 - AUDIT MATERIALITY If management refuses to adjust the financial statements and the result of extended audit procedures do not enable the auditor to consider that the aggregate of uncorrected misstatements is not material, the auditor should consider the appropriate modification in the auditor’s report in accordance with ISA 700. “The Auditor’s Report on Financial Statements” (as revised by ISA 700 Revised and ISA 701) ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  14. ISA 320 - AUDIT MATERIALITY COMMUNICATION OF ERRORS If the auditor has identified a material misstatements….. Communicate with appropriate level of management… on a timely basis… or, if need be, to report it to those charged with governance in accordance with ISA 260 “Communication of Audit Matters with Those Charged with Governance” ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  15. ISA 320 - AUDIT MATERIALITY IAS 320 (REVISED) MATERIALITY IN THE IDENTIFICATION AND EVALUATION OF MISSTATEMENTS An exposure draft December 2004 Comments are requested by April 30, 2005 ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  16. ISA 320 - AUDIT MATERIALITY Background: greater consideration not only of the size of the item, but also of its nature and of the circumstances of the entity The definition of materiality: materiality depends on the size and nature of an item judged in the surrounding circumstances Users: materiality reflects the auditor’s judgment of the needs of users ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  17. ISA 320- AUDIT MATERIALITY Determining materiality: ISA 320 (revised) introduces guidance on the use of percentages of benchmarks for the initial determination of materiality Communication of misstatements tomanagement: communicate to management all known and likely misstatements identified during the audit ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  18. ISA 320- AUDIT MATERIALITY Evaluation of uncorrected misstatements: circumstances related to some misstatements may cause the auditor to evaluate them as material even if they are of a lower level Evaluation of whether the financial statements as a whole are free of material misstatements: the auditor should consider both the uncorrected misstatements and the qualitative aspects of the entity’s accounting practices Special consideration in the audit of SMEs ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

  19. ISA 320 - AUDIT MATERIALITY USE OF PERCENTAGES OF BENCHMARKS • For a profit oriented entity: 5% of profit before tax from continuing operations, or ½ % of total revenue • For a not-for-profit entity, ½ % of total expenses or total revenue • For an entity in the mutual fund industry, ½ % of net asset value ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A.

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