INTERNATIONAL STANDARD ON AUDITING 320
AUDIT MATERIALITY
(Effective for audits of financial statements for periods
beginning on or after December 15, 2004)∗
CONTENTS
Paragraph Introduction ...................................................................................................1-3 Materiality ..................................................................................................... 4-8 The Relationship between Materiality and Audit Risk ..................................9-11 Evaluating the Effect of Misstatements .........................................................12-16 Communication of Errors (17)
International Standard on Auditing (ISA) 320, “Audit Materiality” should be read in
the context of the “P reface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services,” which ts out the application and authority of ISAs.
∗ISA 240, “The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements,” ISA 315, “Understanding the Entity and Its Environment and Asssing the Risks of Material Misstatement,”
ISA 330, “The Auditor’s Procedures in Respon to Assd Risks,” and ISA 500, “Audit Evidence”
gave ri to conforming amendments to ISA 320. The conforming amendments are effective for audits of
financial statements for periods beginning on or after December 15, 2004 and have been incorporated in
the text of ISA 320.
ISA 320
393
AUDIT MATERIALITY
Introduction
1.The purpo of this International Standard on Auditing (ISA) is to establish
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standards and provide guidance on the concept of materiality and its
relationship with audit risk.
2.The auditor should consider materiality and its relationship with audit
risk when conducting an audit.
3.“Materiality” is defined in the International Accounting Standards Board’s
“Framework for the Preparation and Prentation of Financial Statements” in
the following terms:
Information is material if its omission or misstatement could
influence the economic decisions of urs taken on the basis of the
financial statements. Materiality depends on the size of the item or
error judged in the particular circumstances of its omission or
misstatement. Thus, materiality provides a threshold or cut-off point
rather than being a primary qualitative characteristic w hich
information must have if it is to be uful.
Materiality
4.The objective of an audit of financial statements is to enable the auditor to
express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting
framework. The asssment of what is material is a matter of professional
p肉judgment.
5.In designing the audit plan, the auditor establishes an acceptable materiality
level so as to detect quantitatively material misstatements. However, both the
如何识别玉amount (quantity) and nature (quality) of misstatements need to be considered.
Examples of qualitative misstatements would be the inadequate or improper
description of an accounting policy when it is likely that a ur of the financial
statements would be misled by the description, and failure to disclo the
breach of regulatory requirements when it is likely that the conquent
中国第四大岛imposition of regulatory restrictions will significantly impair operating
capability.
6.The auditor needs to consider the possibility of misstatements of relatively
small amounts that, cumulatively, could have a material effect on the financial
statements. For example, an error in a month end procedure could be an
indication of a potential material misstatement if that error is repeated each
month.
7.The auditor considers materiality at both the overall financial statement level
and in relation to class of transactions, account balances, and disclosures.
Materiality may be influenced by considerations such as legal and regulatory
requirements and considerations relating to class of transactions, account ISA 320 394
AUDIT MATERIALITY
ISA 320 395
balances, and disclosures and their relationships . This process may result in different materiality levels depending on the aspect of the financial statements being considered.
8.Materiality should be considered by the auditor when:
(a)Determining the nature, timing and extent of audit procedures;
and
(b)Evaluating the effect of misstatements.
The Relationship Between Materiality and Audit Risk
9.When planning the audit, the auditor considers what would make the financial
statements materially misstated. The auditor’s understanding of the entity and its environment establishes a frame of reference within which the auditor plans the audit and exercis professional judgment about asssing the risks of material misstatement of the financial statements and responding to tho risks throughout the audit. It also assists the auditor to establish materiality and in evaluating whether the judgment about materiality remains appropriate as the audit progress. The auditor’s asssment of materiality, related to class of transactions, account balances, and disclosures, helps the auditor decide such questions as what items to examine and whether to u sampling and substantive analytical procedures. This enables the auditor to lect audit procedures that, in combination, can be expected to reduce audit risk to an acceptably low level.
10.There is an inver relationship between materiality and the level of audit risk,
that is, the higher the materiality level, the lower the audit risk and vice versa. The auditor takes the inver relationship between materiality and audit risk into account when determining the nature, timing and extent of audit procedures. For example, if, after planning for specific audit procedures, the auditor determines that the acceptable materiality level is lower, audit risk is incread. The auditor would compensate for this by either:
(a)Reducing the assd risk of material misstatement, where this is
possible, and supporting the reduced level by carrying out extended or
additional tests of control; or
(b)Reducing detection risk by modifying the nature, timing and extent of
planned substantive procedures.
Materiality and Audit Risk in Evaluating Audit Evidence
成人礼祝福11.The auditor’s asssment of materiality and audit risk may be different at the
time of initially planning the engagement from at the time of evaluating the results of audit procedures. This could be becau of a change in circumstances or becau of a change in the auditor’s knowledge as a result of performing audit procedures. For example, if audit procedures are performed prior to
AUDIT MATERIALITY
period end, the auditor will anticipate the results of operations and the financial
position. If actual results of operations and financial position are substantially
different, the asssment of materiality and audit risk may also change.
Additionally, the auditor may, in planning the audit work, intentionally t the
acceptable materiality level at a lower level than is intended to be ud to
evaluate the results of the audit. This may be done to reduce the likelihood of
undiscovered misstatements and to provide the auditor with a margin of safety
when evaluating the effect of misstatements discovered during the audit.
Evaluating the Effect of Misstatements
12.In evaluating whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting
framework, the aud itor should asss whether the aggregate of
uncorrected misstatements that have been identified during the audit is
material.
13.The aggregate of uncorrected misstatements compris:
(a)Specific misstatements identified by the auditor including the net effect
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of uncorrected misstatements identified during the audit of previous
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periods; and
(b)The auditor’s best estimate of other misstatements which cannot be
specifically identified (i.e., projected errors).
14.The auditor needs to consider whether the aggregate of uncorrected
misstatements is material. If the auditor concludes that the misstatements may
be material, the auditor needs to consider reducing audit risk by extending
audit procedures or requesting management to adjust the financial statements.
In any event, management may want to adjust the financial statements for the
misstatements identified.
15.If management refus to adjust the financial statements and the results of
extended audit procedures do not enable the auditor to conclude that the
aggregate of uncorrected misstatements is not material, the auditor should
consid er the appropriate mod ification to the aud itor’s report in
accordance with ISA 701, “Modifications to the Independent Auditor’s
Report.”
16.If the aggregate of the uncorrected misstatements that the auditor has identified
approaches the materiality level, the auditor would consider whether it is likely
that undetected misstatements, when taken with aggregate uncorrected
misstatements could exceed materiality level. Thus, as aggregate uncorrected
misstatements approach the materiality level the auditor would consider
reducing audit risk by performing additional audit procedures or by requesting
management to adjust the financial statements for identified misstatements. ISA 320 396
AUDIT MATERIALITY
ISA 320 397 Communication of Errors
17.If the auditor has identified a material misstatement resulting from error,
the auditor should communicate the misstatement to the appropriate level of management on a timely basis, and consider the need to report it to tho charge d with governance in accor d ance with ISA 260 “Communication of Au d it Matters with Tho Charge d with Governance.”
Public Sector Perspective
1.In asssing materiality, the public ctor auditor must, in addition to山东寿光蔬菜
exercising professional judgment, consider any legislation or regulation which may impact that asssment. In the public ctor, materiality is also bad on the “context and nature” of an item and includes, for example, nsitivity as well as value. Sensitivity covers a variety of matters such as compliance with authorities, legislative concern or public interest.
