3.0 - Materiality in Audit Planning Flashcards
How important are materiality considerations during audit planning?
Extremely
What should the assessment of materiality at this stage be based off?
Based on the most recent and reliable financial information and will help to determine an effective and efficient audit approach
What three things will materiality assessment help the auditor to decide?
- how many and what items to examine
- whether to use sampling techniques
- what level of misstatement is likely to lead to an auditor to say the financial statements do not give a true and fair view
How are risk and materiality closely connected?
The resulting combination of audit procedures should help to reduce audit risk to an appropriately low level
What should happen at the end of the audit and why?
The value of discovered misstatements should be aggregated at the end of the audit to ensure the total is still below tolerable misstatement
Define tolerable misstatement
The maximum misstatement that an auditor is prepared to accept in a class of transactions or balances in the financial statements
How do auditors set the materiality level?
To set the materiality level the auditors need to decide the level of misstatement that would distort the view given by the accounts
How is the materiality level often expressed and why?
Because many users of accounts are primarily interested in the profitability of the company, the level is often expressed as a proportion of its profits
How is the level of materiality and size of a business connected?
Positive correlation - if business grows, so does level of materiality
What will auditors often do to get the preliminary material level?
Often calculate a range of values and then take an average or weighted average of all the figures produced
What should one bear in mind about materiality?
It has qualitative, as well as quantitative, aspects - e.g transactions relating to directors are considered material by nature regardless of their value
