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 determination of performance materiality involves the exercise of professional judgment based on fac<strong>to</strong>rs
that address audit risk, such as the following:
• Understanding of the entity and the results of performing risk assessment procedures;
• Nature and extent of misstatements identified in previous audits; and,
• Expectations of possible misstatements in the current period.
Performance materiality as a whole or for individual balances, transactions, and disclosures may have <strong>to</strong> be
changed at any time during the audit (without impacting overall materiality) <strong>to</strong> reflect revised risk assessments,
audit findings, and new information obtained. At the conclusion of the audit, the overall materiality would be
used for evaluating the effect of identified misstatements on the financial statements and determining the
opinion <strong>to</strong> be expressed in the audi<strong>to</strong>r’s report. (See Volume 2, Chapter 21 for further guidance.)
CONSIDER POINT
When a possible misstatement is identified, address the circumstances of occurrence and the impact on
risk assessments/audit plans before reconsidering performance materiality.
Specific Materiality
There are some situations where 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.
Exhibit 7.5-3
Decision
Influencers
Laws, Regulations,
and Accounting
Framework
Requirements
Key Industry
Disclosures
Disclosure of
Significant Events
and Important
Changes in
Operations
Possible Examples
• Sensitive financial statement disclosures such as the remuneration of
management and those charged with governance.
• Related-party transactions.
• Non-compliance with loan covenants, contractual agreements, regula<strong>to</strong>ry
provisions, and statu<strong>to</strong>ry/regula<strong>to</strong>ry reporting requirements.
• Certain types of expenditures such as illegal payments or executives’ expenses.
• Reserves and exploration costs for a mining entity.
• Research and development costs for a pharmaceutical entity.
• Newly acquired businesses or expansion of operations.
• Discontinued operations.
• Unusual events or contingencies (e.g., lawsuits).
• Introduction of new products and services.
The audi<strong>to</strong>r would consider the existence of matters such as the above for one or more particular classes of
transactions, account balances, or disclosures. The audi<strong>to</strong>r may also find it useful <strong>to</strong> obtain an understanding
of the views and expectations of management and those charged with governance.