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
The responsibility of the audi<strong>to</strong>r is <strong>to</strong> reduce <strong>to</strong> an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements in the financial statements exceeds the materiality for the financial
statements as a whole. If the audi<strong>to</strong>r simply planned <strong>to</strong> perform audit procedures that would identify individual
misstatements exceeding 10,000Є, there is a risk that the aggregate of individually immaterial misstatements
not identified during the audit would result in the 10,000Є materiality threshold being exceeded. So the audi<strong>to</strong>r
needs <strong>to</strong> perform some additional work that is sufficient <strong>to</strong> allow for a margin or buffer for possible undetected
misstatements. The purpose of performance materiality is <strong>to</strong> provide such a buffer.
Performance materiality enables the audi<strong>to</strong>r <strong>to</strong> establish materiality amounts (based upon, but lower than,
overall materiality) that reflect the risk assessments for the various financial statement areas. These lower
amounts provide a safety buffer between the materiality (performance materiality) used for determining the
nature and extent of audit procedures <strong>to</strong> be performed and the overall materiality.
In the example above, the audi<strong>to</strong>r using professional judgment may decide that a performance materiality of
6,000Є would be used in designing the extent of the audit procedures <strong>to</strong> be performed. The buffer of 4,000Є
(10,000Є - 6,000Є) between performance materiality and overall materiality provides a safety margin for any
undetected misstatements that may exist.
7.2 Financial Statement Users
Materiality is used in both preparing and auditing the financial statements. Materiality for the financial
statements as a whole (overall materiality) is often explained (such as in financial reporting frameworks) in the
terms such as below.
Exhibit 7.2-1
Influence on
Making Economic
Decisions
Surrounding
Circumstances
Common Needs
of Users
Misstatements, including omissions, are considered <strong>to</strong> be material if they, individually
or in the aggregate, could reasonably be expected <strong>to</strong> influence the economic
decisions of users taken on the basis of the financial statements.
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.
Judgments about matters that are material <strong>to</strong> users of the financial statements are
based on a consideration of the common financial information needs of users as a
group. The possible effect of misstatements on specific individual users, whose needs
may vary widely, is not considered.
The audi<strong>to</strong>r determines materiality based on his/her perception of the needs of users. In applying his/her
professional judgment, it is reasonable for the audi<strong>to</strong>r <strong>to</strong> assume that users of the financial statements:
• Have a reasonable knowledge of business, economic activities, and accounting, and have a willingness
<strong>to</strong> study the information in the financial statements with reasonable diligence;
• Understand that financial statements are prepared and audited <strong>to</strong> 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; and
• Make reasonable economic decisions on the basis of the information in the financial statements.