CPA P2 Audit Practice & Assurance Services

Transcription

1 TOPIC 28 MATERIALITY ISA 320 Materiality in Planning and Perfrming an Audit prvides guidance t auditrs in this area and states the bjective f the auditr is t apply the cncept f materiality apprpriately in planning and perfrming the audit. Overview An errr/missin is material if its existence affects hw users f the FS react Hence, auditrs will examine all material areas f the FS, and will examine areas which appear immaterial but culd be materially understated!!! Items are material bth by SIZE and by NATURE MATERIAL BY SIZE (QUANTITATIVE) The audit team needs t knw what size errrs are imprtant when they are ding their audit wrk. T achieve this, firms typically have a standard methd fr calculating a baseline materiality figure as part f the planning prcess. Cmmn measures are: ½ - 1% f turnver 5-10% f prfits 1-2% f ttal assets 1

2 Hwever, these are up t the judgment f the auditr. As a result, different firms use different measures. Any calculatin dne is very flexible, and may have t be reassessed during the audit (if fr example many large errrs are fund). Whilst this calculatin is helpful, it has prblems as several small immaterial errrs culd add up t an verall material errr!! Perfrmance Materiality is the amunt set by the auditr at less than materiality fr the FS as a whle t reduce t an apprpriately lw level the prbability that the aggregate f uncrrected and undetected misstatements exceeds materiality fr the FS as a whle Example: student tk an admissin in an auditing curse. Curse cntains 60 lectures in ttal. In rder t qualify fr exam entrance, students have t fulfil attendance criteria i.e. student can be absent frm 10 lectures as a whle but nt mre than 1 lecture in a week. Nw the abve attendance plicy has tw levels f restrictins. First that students cannt leave mre than 10 lectures unattended during the whle curse. Whereas, the secnd level is that maximum f ne lecture can be left unattended in a particular week. This secnd restrictin is prbably there t ensure that n student fall shrt f 50 lectures in ttal and must attend at least 50 lectures. In simple wrds this secnd layer, which is mre stringent then the first, is ensuring that first level f restrictin is nt breached. Same ges in auditing. Perfrmance materiality (materiality established fr a particular cmpnent inside financial statement fr example an assertin level) i.e. materiality established while perfrming audit prcedures n certain accunt balances and/r transactins etc. is deliberately settled lwer than the materiality level fr the financial statements as a whle s that verall misstatements are kept under the materiality level fr the financial statement as a whle (materiality level established fr the whle financial statement fr example financial statement level). 2

3 TOLERABLE MISSTATEMENT/RATE OF DEVIAITON Tlerable Misstatement is a mnetary amunt set by the auditr and is the maximum misstatement that the auditrs are willing t tlerate in an accunt balance r class f transactins and still cnclude that the balance being audited is true and fair. If the auditr is perfrming tests f cntrl, then he is testing whether a cntrl prcedure has been fllwed, nt that a balance is crrect. Tlerable Errr will therefre be the maximum number f cntrl failures that the auditr is prepared t accept, whilst still believing that the cntrl can be relied n verall. This is the tlerable rate f deviatin. MATERIAL BY NATURE (QUALITATIVE) All transactins with directrs are likely t be material by nature An item f a nn recurring r exceptinal nature r arising frm unusual circumstances is likely t be f mre significance than an item arising ut f the rdinary activities f the business A fine impsed by a regulatry authrity (nn recurring) Bad Debts r inventry lsses f an abnrmally high amunt Statutry disclsure items: Certain items are required t be accunted fr r disclsed in a certain manner, by Cmpany Law. Any misstatement f these is material and as such 100% precisin is required. Directrs remuneratin and lans 3

4 Interest Payable/Receivable including maturity analysis f related liabilities Share Capital/Share Premium Auditrs Remuneratin Depreciatin in s far as amunts disclsed are cncerned Nature f the Accunt Balance: A misstatement in a transactin that affects nly the Statement f Financial Psitin classificatin (e.g. cut-ff f receipts frm receivables) is less likely t be material than a misstatement that affects the determinatin f prfits (e.g. Irrecverable debts) Critical Turning Pints: An item which wuld therwise be regarded as immaterial f insignificant might, if crrected r disclsed have a critical impact n the verall view. A minr adjustment that wuld turn a small prfit int a small lss r vice versa If directrs bnuses kick in at a certain level, and the cmpany is clse t this, any adjustments that change the prfit level may be material, hwever small Same is true if cmpany has cmmitted t maintaining certain ratis (e.g. as a lan cvenant, they may have cmmitted t a minimum current rati) Milestne Items which are therwise immaterial such as revenue r prfit befre tax ging frm say 998,662 t say 1,003,098 r say 9,897,000 t say 10,028,000. We can als apply the same thinking t Net Assets. All transactins with directrs are likely t be material by nature Related Party Transactins (RPT s): Per IAS 24 (Related Party Disclsures), financial statements must disclse fully any material transactins undertaken with a related party by the reprting entity, regardless f any price charged. 4

5 We must lk at these frm the pint f view f bth the cmpany and the related party the danger with RPT s is the risk f transactins nt being cnducted at arms length and transactins may ccur which are intended t bscure/hide financial prblems. In additin RPT s must be fully disclsed in the ntes t the financial statements. QUESTION: MATERIALITY 5

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