materiality principle (auditing)

 

  • Qualitative materiality refers to the nature of a transaction or amount and includes many financial and non-financial items that, independent of the amount, may influence
    the decisions of a user of the financial statements.

  • The amended definition of materiality is effective from 1 January 2020: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence
    the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

  • It is important to identify the primary users since materiality reflects the auditor’s judgment of the needs of users in relation to the information in the financial statements.

  • Two different auditors auditing even the same entity might generate differing scopes of audit procedures, solely based on the “planning materiality” definition used.

  • However, the Framework has as its purpose to, inter alia, assist the International Accounting Standards Board (IASB) and individual national standard-setting bodies in promoting
    harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs.

  • While rules of thumb mentioned in the section above are commonly applied to state and local government financial statements, government auditors may also use different means
    to quantify materiality such as total cost or net cost (expenses less revenues or expenditure less receipts).

  • Paragraph 9 also states that the purpose of setting performance materiality is to reduce the risk that the aggregate total of uncorrected misstatements could be material to
    the financial statements.

  • [2] Definitions of Materiality Materiality in accounting[edit] The IFRS Foundation has as its mission to develop a single set of high quality, understandable, enforceable
    and globally accepted financial reporting standards based upon clearly articulated principles.

  • Most importantly, due to the format of state and local government financial statements under GAAP, the AICPA Audit Guide for State and Local Governments requires auditors
    to consider materiality by “opinion unit” rather than for the financial statements taken as a whole.

  • Information is said to be material if omitting it or misstating it could influence decisions that users make on the basis of an entity’s financial statements.

  • Methods from Discussion Paper 6: Audit Risk and Materiality, as issued in July 1984[edit] These methods offer a suggested range for the calculation of materiality.

  • Qualitative considerations of materiality are therefore different from in private-sector auditing, in which qualitative considerations are focused on the effect on earnings
    per share, executive bonuses or other risks that are not applicable to governments.

  • This functionally decreases materiality for state and local government financial statements by an order of magnitude compared to materiality for private company financial
    statements.

  • [1] The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects,
    in conformity with an identified financial reporting framework, such as the Generally Accepted Accounting Principles (GAAP) which is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC).

  • In terms of ISA 200, the purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.

  • [4] Chapter 3 of the Conceptual Framework deals specifically with the quantitative characteristics of financial information that make it useful to the users of the financial
    statements.

  • Put differently, “materiality is an entity-specific aspect of relevance, based on the size, or magnitude, or both,” of the items to which financial information relates.

  • The research study also cites KPMG’s formula-based method: Materiality = 1.84 times (the greater of assets or revenues)2/3.

  • The concave nature of the function leads to a lower materiality threshold (which implies less tolerance for misstatement) as the company becomes larger because more users
    are relying on the financial statements.

  • The assessment of what is material – where to draw the line between a transaction that is big enough to matter or small enough to be immaterial – depends upon factors such
    as the size of the organization’s revenues and expenses, and is ultimately a matter of professional judgment.

  • (This will generally always be present, although the individual components and size will change between governmental entities.)

  • However, some experts regard the concept as inadequately defined, based only on the development of case law.

  • Based on the audit risk, the auditor will select a value inside this range.

  • Finally, in government auditing, the political sensitivity to adverse media exposure often concerns the nature rather than the size of an amount, such as illegal acts, bribery,
    corruption and related-party transactions.

  • Materiality in auditing[edit] The International Auditing and Assurance Standards Board (IAASB) is an independent standard-setting body that serves the public interest by setting
    high-quality international standards for auditing, assurance, and other related standards.

  • In determining the relevance of financial information, regard needs to be given to its materiality.

 

Works Cited

[‘Reasonable Investor(s), Boston University Law Review, available at: http://ssrn.com/abstract=2579510
2. ^ SEC Staff Accounting Bulletin 99 – Materiality, available at: https://www.sec.gov/interps/account/sab99.htm
3. ^ IFRS Foundation, International
Accounting Standards Board (IASB) (2015). Who we are and what we do (PDF). IFRS Foundation e-Book. p. 1.
4. ^ IFRS Foundation, International Accounting Standards Board (IASB) (September 2010). Conceptual Framework (PDF). IFRS Foundation. pp. A23.
5. ^
IFRS Foundation, International Accounting Standards Board (IASB) (September 2010). Conceptual Framework (PDF). IFRS Foundation. pp. A31, A32.
6. ^ “IASB clarifies its definition of ‘material'”. 31 October 2018. Retrieved 2018-11-03.
7. ^ Torelli,
Riccardo; Balluchi, Federica; Furlotti, Katia (2019-07-22). “The materiality assessment and stakeholder engagement: A content analysis of sustainability reports”. Corporate Social Responsibility and Environmental Management. 27 (2): 470–484. doi:10.1002/csr.1813.
ISSN 1535-3958.
8. ^ “About IAASB”. IFAC. International Federation of Accountants. Retrieved 4 November 2015.
9. ^ IAASB. ISA 200: Overall objectives of the independent auditor and the conduct of an audit in accordance with the International Standards
on Auditing (PDF). IFAC. p. 72.
10. ^ IAASB. ISA 320: Materiality in planning and performing an audit (PDF). IFAC. p. 315.
11. ^ Oesterle, Dale (2011). The overused and under-defined notion of “material” in securities law. Penn Law. p. 207.
12. ^
“South African Institute of Chartered Accountants Frequently Asked Questions”. SAICA. South African Institute of Chartered Accountants. Retrieved 4 November 2015.
13. ^ McKee, Thomas E.; et al. (2000). “Working paper no. 51/00: Current materiality
guidance for auditors” (PDF). Working Paper- Foundation for Research in Economics and Business Administration. Foundation for Research in Economic and Business Administration: 4. ISSN 0803-4028.
14. ^ “Materiality in a financial statement audit”.
Pastel. Sage Pastel. Retrieved 4 November 2015.
Photo credit: https://www.flickr.com/photos/nahidv/13910126337/’]