ISA 320 – Materiality in planning and performing an audit Flashcards
What is materiality in the context of an audit according to ISA 320?
Materiality is a concept applied by auditors in planning and performing audits, in evaluating the effects of identified misstatements, and in forming an opinion in the auditor’s report. An item is considered material if its misstatement or omission could influence the economic decisions of users based on the financial statements.
When is materiality assessed during an audit and can it change?
Materiality is assessed during the planning phase of an audit but can be revised at any time to reflect new risks or misstatements found during the audit. It is not set in stone.
How do auditors determine materiality in an audit?
Auditors establish materiality for the financial statements as a whole during the overall audit strategy phase. They consider both the size and nature of items, including sensitive areas like director’s remuneration or small numbers that trigger thresholds.
What additional factors should auditors consider when assessing materiality?
Auditors need to consider the elements of the financial statements, areas of user focus, the nature of the entity, its lifecycle, industry/economic environment, ownership structure, financing, the volatility of benchmarks, and errors identified in prior periods.
What are some typical benchmarks used to assess materiality in an audit?
Common benchmarks include 5-10% of profits, 0.5-5% of revenue, 0.5-2% of total assets, 0.5-1% of net assets, and 1-2% of equity.
What is performance materiality and why is it important in an audit?
Performance materiality is determined by the auditor to assess the risks of material misstatement and to decide the nature, timing, and extent of further audit procedures. It is set at a level lower than the overall materiality for the financial statements to ensure that the probability of the aggregate of uncorrected and undetected misstatements exceeding the overall materiality is kept low.
How is performance materiality set in relation to overall materiality?
Performance materiality is set at a level significantly lower than overall materiality for the financial statements. This setting helps in reducing the likelihood that the total of all uncorrected and undetected misstatements will exceed the materiality level determined for the financial statements.
What factors influence the setting of performance materiality?
Performance materiality is based on the auditor’s judgment and expectations concerning the risk of misstatements, taking into account the specific circumstances of the audit engagement.
What are the different levels of materiality in the context of an audit according to ISA 320?
There are three levels of materiality:
1) Overall materiality, which sets the maximum amount by which the financial statements can be misstated without affecting the decisions of users;
2) Performance materiality, which is lower than overall materiality;
3) The ‘Clearly Trivial’ threshold, which defines the smallest amount that is considered immaterial to the financial statements.
