Under ISA 320, misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements; the auditor determines this threshold through professional judgment in light of the surrounding circumstances.
How Are Judgments About Materiality Formed?
The standard states that judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both — not by size alone.
What Is the Difference Between Performance Materiality and Overall Materiality?
The standard defines performance materiality as the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce aggregation risk to an appropriately low level; it is used for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures.
When Does the Auditor Determine Materiality, and When Is It Revised?
The standard requires that, when establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole, and shall also determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures. The standard also requires the auditor to revise materiality for the financial statements as a whole in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount initially.
What Must Be Documented?
- Materiality for the financial statements as a whole.
- The materiality level or levels for particular classes of transactions, account balances or disclosures, if applicable.
- Performance materiality.
- Any revision of the above as the audit progressed.
How Does This Standard Relate to Evaluating Identified Misstatements?
ISA 320 notes that another standard, ISA 450, explains how materiality is applied in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements. Materiality is therefore used at two complementary stages: planning and performing the audit, and evaluating its results.
What Assumptions Does the Auditor Make About Users?
The standard states it is reasonable for the auditor to assume that users:
- Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence.
- Understand that financial statements are prepared, presented and audited to levels of materiality.
- Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events.
Legal References
- ISA 320 — Materiality in Planning and Performing an Audit, Paragraphs 2, 4, 9, 10, 11 and 12.
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