Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
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Relevant Extracts from ISAs
320.9 For purposes of the ISAs, performance materiality means the amount or amounts set by
the audi<strong>to</strong>r at less than materiality for the financial statements as a whole <strong>to</strong> reduce <strong>to</strong> an
appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the financial statements as a whole. If applicable,
performance materiality also refers <strong>to</strong> the amount or amounts set by the audi<strong>to</strong>r at less than the
materiality level or levels for particular classes of transactions, account balances or disclosures.
320.10 When establishing the overall audit strategy, the audi<strong>to</strong>r shall determine materiality for the
financial statements as a whole. If, in the specific circumstances of the entity, there is one or
more particular classes of transactions, account balances or disclosures for which misstatements
of lesser amounts than materiality for the financial statements as a whole could reasonably
be expected <strong>to</strong> influence the economic decisions of users taken on the basis of the financial
statements, the audi<strong>to</strong>r shall also determine the materiality level or levels <strong>to</strong> be applied <strong>to</strong> those
particular classes of transactions, account balances or disclosures. (Ref: Para. A2-A11)
320.11 The audi<strong>to</strong>r shall determine performance materiality for purposes of assessing the risks
of material misstatement and determining the nature, timing and extent of further audit
procedures. (Ref: Para. A12)
7.1 Overview
Materiality addresses the significance of financial statement information <strong>to</strong> economic decisions made by
users on the basis of the financial statements. The concept of materiality recognizes that some matters, either
individually or in the aggregate, are important <strong>to</strong> people making an economic decision based on the financial
statements. This could include decisions such as whether <strong>to</strong> invest in, purchase, do business with, or lend
money <strong>to</strong> an entity.
This chapter addresses the use of materiality in auditing in general. See Volume 2, Chapter 6 of this <strong>Guide</strong> for
additional guidance on establishing specific materiality amounts.
When a misstatement (or the aggregate of all misstatements) is significant enough <strong>to</strong> change or influence
the decision of an informed person, a material misstatement has occurred. Below this threshold, the
misstatement is generally regarded as not material. This threshold, above which the financial statements
would be materially misstated, is called “materiality for the financial statements as a whole.” For the purposes
of this <strong>Guide</strong>, this term has been shortened <strong>to</strong> “overall materiality.”
Note:
The determination of “materiality for the financial statements as a whole” (overall materiality) is not based
on any assessment of audit risk. It is determined entirely in relation <strong>to</strong> the users of the financial statements. It
would typically be the same as that used by the preparer of the financial statements.
Let’s assume that the decision of a financial statement user group would be influenced by a misstatement
of 10,000Є in the financial statements. This would be the materiality for the financial statements as a whole
(or overall materiality) for both the preparer and the audi<strong>to</strong>r. Any individual misstatement or aggregate
of individually immaterial misstatements that exceeds the 10,000Є amount would result in the financial
statements being materially misstated.