Materiality in Planning and Performing an Audit

Journal of Accountancy, April 2010 | Go to article overview

Materiality in Planning and Performing an Audit


Statement on Auditing Standards (SAS) Materiality in Planning and Performing an Audit supersedes SAS No. 107, Audit Risk and Materiality in Conducting an Audit (AICPA, Professional Standards, vol. 1, AU sec. 312).

CONTENTS

Introduction
Scope of This Statement on Auditing
   Standards/1-6
Effective Date/7
Objective/8
Definition/9
Requirements
Determining Materiality and Performance
   Materiality When Planning the Audit/10-11
Revision as the Audit Progresses/12-13
Documentation/14
Application and Other Explanatory Material
Materiality and Audit Risk/A1
Performance Materiality/A2
Determining Materiality and Performance
   Materiality When Planning the Audit/A3-A14
Revision as the Audit Progresses/A15-A16

INTRODUCTION

Scope of This Statement on Auditing Standards

1. This Statement on Auditing Standards (SAS) addresses the auditor's responsibility to apply the concept of materiality in planning and performing an audit of financial statements. The clarified SAS Evaluation of Misstatements Identified During the Audit explains how materiality is applied in evaluating the effect of identified misstatements on the audit and the effect of uncorrected misstatements, if any, on the financial statements.

Materiality in the Context of an Audit

2. Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. 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 made on the basis of the financial statements.

* judgments 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.

* judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.

3. Such a discussion about materiality 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 provide the auditor with such a frame of reference.

4. The auditor's determination of materiality is a matter of professional judgment and is affected by the auditor's perception of the financial information needs of users of the financial statements. In this context, it is reasonable for the auditor to assume that users

a. have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence;

b. understand that financial statements are prepared, presented, and audited to levels of materiality;

c. recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment, and the consideration of future events; and

d. make reasonable economic decisions on the basis of the information in the financial statements.

5. The concept of materiality is applied by the auditor both in planning and performing the audit; evaluating the effect of identified misstatements on the audit and the effect of uncorrected misstatements, if any, on the financial statements; and in forming the opinion in the auditor's report. (Ref: par. A1)

6. In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material. These judgments provide a basis for

a. …

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