Materiality Scope ISA 320

Question 1

ISA 320

Answer 1

Here are the simplified smart notes:

ISA 320 - Materiality

Scope: Auditor’s responsibility to apply materiality concept in planning and performing an audit of financial statements.

What is Materiality?

• Materiality is determined based on what could influence the economic decisions of users, not management.
• Misstatements are material if they could reasonably influence users’ decisions.

Definition of Materiality:

“Misstatements, including omissions, are considered material if they could reasonably influence the economic decisions of users based on the financial statements.”

Determining Materiality

Steps:

1. Understand ownership structure and users of financial statements.
2. Determine elements of financial statements.
3. Identify benchmark of most importance to users.
4. Determine percentage to apply to selected benchmark.
5. Determine performance materiality and clearly trivial threshold.

Note: Determining materiality is a matter of professional judgment and not a mechanical exercise.