Guide to Using International Standards on Auditing in - IFAC
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Guide to Using International Standards on Auditing in - IFAC

Guide to Using International Standards on Auditing in - IFAC Guide to Using International Standards on Auditing in - IFAC

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17.03.2014 Views

88 ong>Guideong> ong>toong> ong>Usingong> ong>Internationalong> ong>Standardsong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts 7.4 Materiality and Audit Risk Materiality (as discussed above) and audit risk are related, and are considered ong>toong>gether throughout the audit process. Audit risk is the possibility that an audiong>toong>r expresses an inappropriate audit opinion on financial statements that are materially misstated. Exhibit 7.4-1 Risks of Material Misstatement (RMM) Detection Risk Audit Risk Components The risk that the financial statements are materially misstated prior ong>toong> the start of any audit work. These risks are considered at the financial statement level (often pervasive risks, affecting many assertions) and at the assertion level, which relates ong>toong> classes of transactions, account balances, and disclosures. RMM is a combination of inherent risk (IR) and control risk (CR), which can be summarized as IR x CR = RMM. The risk that the audiong>toong>r fails ong>toong> detect a misstatement that exists in an assertion that could be material. Detection risk (DR) is addressed through: • Sound audit planning; • Performing audit procedures that respond ong>toong> the risks of material misstatement identified; • Proper assignment of audit personnel; • The application of professional skepticism; and • Supervision and review of the audit work performed. Detection risk can never be reduced ong>toong> zero, because of the inherent limitations in the audit procedures carried out, the human judgments (professional) required, and the nature of the evidence examined. Audit risk (AR) can therefore be summarized as: AR = RMM x DR Materiality and audit risk are considered throughout the audit in: • Identifying and assessing the risks of material misstatement; • Determining the nature, timing, and extent of further audit procedures; • Determining revisions ong>toong> materiality (overall and performance) after becoming aware of new information during the audit, which would have caused the audiong>toong>r ong>toong> have determined a different amount (or amounts) initially; and • Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the audiong>toong>r’s report. ong>Usingong> the simple analogy of a high jump in athletics, materiality would be equivalent ong>toong> the height of the bar the athlete has ong>toong> jump over. Audit risk is equivalent ong>toong> the level of difficulty inherent in the jump at that particular height (RMM), combined with the additional risk of making a mistake in jump strategy or execution (detection risk).

89 ong>Guideong> ong>toong> ong>Usingong> ong>Internationalong> ong>Standardsong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts 7.5 Materiality Levels Paragraph # Relevant Extracts from ISAs 320.12 The audiong>toong>r shall revise materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the audiong>toong>r ong>toong> have determined a different amount (or amounts) initially. (Ref: Para. A13) 320.13 If the audiong>toong>r concludes that a lower materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the audiong>toong>r shall determine whether it is necessary ong>toong> revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate. 320.14 The audiong>toong>r shall include in the audit documentation the following amounts and the facong>toong>rs considered in their determination: (a) Materiality for the financial statements as a whole; (b) If applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures; (c) Performance materiality; and (d) Any revision of (a)-(c) as the audit progressed. Exhibit 7.5-1 “Overall” Materiality (for the financial statements as a whole) “Overall” Performance Materiality “Specific” Materiality (for particular financial statement areas) “Specific” Perfomance Materiality Quantitative amount Note: The terms “overall” and “specific” used in the exhibit above and in the text below are used for the purposes of this ong>Guideong> and are not terms used in the ISAs. Overall materiality refers ong>toong> materiality for the financial statements as a whole; specific materiality relates ong>toong> materiality for particular classes of transactions, account balances, or disclosures. At the start of the audit, the audiong>toong>r makes judgments about the size and nature of misstatements that would be considered material. This includes establishing materiality amounts as set out below.

89<br />

<str<strong>on</strong>g>Guide</str<strong>on</strong>g> <str<strong>on</strong>g>to</str<strong>on</strong>g> <str<strong>on</strong>g>Us<strong>in</strong>g</str<strong>on</strong>g> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> <strong>on</strong> <strong>Audit<strong>in</strong>g</strong> <strong>in</strong> the Audits of Small- and Medium-Sized Entities Volume 1—Core C<strong>on</strong>cepts<br />

7.5 Materiality Levels<br />

Paragraph #<br />

Relevant Extracts from ISAs<br />

320.12 The audi<str<strong>on</strong>g>to</str<strong>on</strong>g>r shall revise materiality for the f<strong>in</strong>ancial statements as a whole (and, if applicable,<br />

the materiality level or levels for particular classes of transacti<strong>on</strong>s, account balances or<br />

disclosures) <strong>in</strong> the event of becom<strong>in</strong>g aware of <strong>in</strong>formati<strong>on</strong> dur<strong>in</strong>g the audit that would have<br />

caused the audi<str<strong>on</strong>g>to</str<strong>on</strong>g>r <str<strong>on</strong>g>to</str<strong>on</strong>g> have determ<strong>in</strong>ed a different amount (or amounts) <strong>in</strong>itially. (Ref: Para. A13)<br />

320.13 If the audi<str<strong>on</strong>g>to</str<strong>on</strong>g>r c<strong>on</strong>cludes that a lower materiality for the f<strong>in</strong>ancial statements as a whole (and, if<br />

applicable, materiality level or levels for particular classes of transacti<strong>on</strong>s, account balances or<br />

disclosures) than that <strong>in</strong>itially determ<strong>in</strong>ed is appropriate, the audi<str<strong>on</strong>g>to</str<strong>on</strong>g>r shall determ<strong>in</strong>e whether<br />

it is necessary <str<strong>on</strong>g>to</str<strong>on</strong>g> revise performance materiality, and whether the nature, tim<strong>in</strong>g and extent of<br />

the further audit procedures rema<strong>in</strong> appropriate.<br />

320.14 The audi<str<strong>on</strong>g>to</str<strong>on</strong>g>r shall <strong>in</strong>clude <strong>in</strong> the audit documentati<strong>on</strong> the follow<strong>in</strong>g amounts and the fac<str<strong>on</strong>g>to</str<strong>on</strong>g>rs<br />

c<strong>on</strong>sidered <strong>in</strong> their determ<strong>in</strong>ati<strong>on</strong>:<br />

(a) Materiality for the f<strong>in</strong>ancial statements as a whole;<br />

(b) If applicable, the materiality level or levels for particular classes of transacti<strong>on</strong>s, account<br />

balances or disclosures;<br />

(c) Performance materiality; and<br />

(d) Any revisi<strong>on</strong> of (a)-(c) as the audit progressed.<br />

Exhibit 7.5-1<br />

<br />

<br />

“Overall” Materiality<br />

(for the f<strong>in</strong>ancial statements as a whole)<br />

“Overall” Performance Materiality<br />

<br />

<br />

<br />

“Specific” Materiality<br />

<br />

(for particular f<strong>in</strong>ancial statement areas)<br />

“Specific” Perfomance<br />

Materiality<br />

Quantitative amount<br />

Note: The terms “overall” and “specific” used <strong>in</strong> the exhibit above and <strong>in</strong> the text below are used for the<br />

purposes of this <str<strong>on</strong>g>Guide</str<strong>on</strong>g> and are not terms used <strong>in</strong> the ISAs. Overall materiality refers <str<strong>on</strong>g>to</str<strong>on</strong>g> materiality for<br />

the f<strong>in</strong>ancial statements as a whole; specific materiality relates <str<strong>on</strong>g>to</str<strong>on</strong>g> materiality for particular classes of<br />

transacti<strong>on</strong>s, account balances, or disclosures.<br />

At the start of the audit, the audi<str<strong>on</strong>g>to</str<strong>on</strong>g>r makes judgments about the size and nature of misstatements that would<br />

be c<strong>on</strong>sidered material. This <strong>in</strong>cludes establish<strong>in</strong>g materiality amounts as set out below.

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