Materiality

Question 1

What is materiality, when is it decided

Answer 1

A matter may be deemed material (by size or nature) if the omission or misstatement could influence users of financial statements decisions.

Decided in the planning phase although it can be changed/ revised.

Question 2

How is the materiality figure set

Answer 2

The auditor must use their professional judgement when setting the level of materiality for an engagement.

Nothing in the standard that shows how to calculate materiality.
It is the businesses decision

Question 3

Materiality guidelines by size

Answer 3

Guidelines suggest we use

R- Revenue 0.5-1%

A- Assets 1-2%

P- Profit before tax 5-10%

These are benchmarks used to assess materiality.
These are used as a start point, but not set by standards. It is a choice of organisation.

e.g if more then 1% revenue it would be material.

There is a range showing subjectivity. If something is 8% profit for e.g doesn’t mean not significant

These are benchmarks set. Can use others such as operating expenses rather profit for example, if it is a not for profit business.

Question 4

Materiality by nature

Answer 4

Some matters are automatically material. For example anything to do with directors ,e.g directors loan, is always material as directors matters have to be disclosed in financial st.

Any amount that turns a profit into a loss could be seen as material.

Any amount that changes the threshold for a company e.g from medium to small etc.

Written disclosures are material if omitted when standards said they need to be there.

Question 5

What is performance materiality

Answer 5

Number set that is less than total materiality. This applies to individual transactions.

This is to reduce the risk that undetected errors exceeds the total materiality threshold by removing the larger single errors.

Question 6

Tolerable misstatement

Answer 6

Maximum misstatement Auditor is willing to accept in population/class of transactions before becoming concerned it may cause a material misstatement.

often set around 50%-75% of performance materiality.

A figure is required for each population.

Question 7

Materiality process outlined

Answer 7

Work out materiality for financial statements as a whole

Work out performance materiality from total materiality ( not FS)

Test all items =>performance materiality

Sample from remaining items and ensure misstatement doesn’t exceed tolerable misstatement

Materiality for statements as a whole revised (can be changed, never set)

Question 8

Why may we change materiality

Answer 8

Draft financial statements may be altered due to error so overall materiality may change

External factors may cause changes in risk

Question 9

What is financial statement materiality

Answer 9

misstatement in the financial statements as a whole that the auditors believe would influence the decisions of users.