MATERIALITY

The concept of materiality is fundamental consideration in all auditing procedures and practices.

Materiality refers to the level of misstatement (including omissions) that could individually or in
aggregate affect the economic decisions of the users of the financial statements.

Materiality is not an absolute term and must be understood in its relative context. This means
that the same item of the same magnitude may be material to one entity and non-material to
another entity. The auditor decides what material is and what is non-material. This id relative
term which differ from entity to entity and may also differ from one year to year.

According to (A.H.Milichamp, 1986) says an auditor needs to consider materiality throughout

the audit process i.e. while planning, while performing audit procedures, in evaluating the effects
of identified misstatements on the audit and uncorrected misstatements, if any, on the financial
statements and also while giving an auditor report.

DETERMINANTS OF MATERIALITY

Materiality is considered at the overall financial information level, as well as in relation to

individual accounts balances and classes of transactions. Determining materiality for the
financial statements as a whole is a matter of professional judgment. Materiality is determined
on the basis of quantitative and qualitative factors. In order to ensure that the audit is conducted
efficiently, it is important that the materiality is assessed based on the latest (and almost reliable)
available financial statements. The following diagram will help to revise these factors.

APPLICATION OF MATERIALITY IN FINANCIAL REPORTING AND AUDITING

In an audit, materiality should be considered by the auditor when:

 Planning i.e. determine the nature, timing and extent of audit procedures
 Reporting i.e. evaluating the effects of misstatements

When planning, the auditor determine the materiality, considers materiality with audit risk, and
decides nature, timing and the extent of audit procedures. This is because it is not practical for an
auditor to perform 100% of an audit. His duty is to confirm that the financial statements are
materiality misstated. Therefore, he does not need to concentrate on matter that do not affect the
financial statements materially.

Therefore, when planning an audit, the auditor consider what would make the financial
statements materially misstated. The auditor’s assessment of materiality, related to specific
account balances and classes of transactions, helps the auditor to select audit procedures that, in
combination, can be expected to reduce audit risk to an acceptably low level.

WHILE APPLING MATERIALITY, THE FOLLOWING POINTS SHOULD BE

CONSIDERED:

 The size, nature of the item and its impact on the financial statements
 Some matters, individually or in aggregate, are important for the fair presentation of the
financial statements taken as a whole
 It should be considered at both the overall financial statements level as well as in relation
to an individual account balance.

MATERIALITY HAS AN IMPACT ON IN THE FOLLOWING:

 Planning audit procedures: At the planning stage, an auditor sets levels of materiality and
performance materiality on the basis of which the nature, timing and extent of the audit
procedures are decided. If an item is material, extensive audit procedures should be
planned to be performed.
 Deciding the sample size: For material items, a larger sample size is selected.
 Assessing the risk: Audit risk is the risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated. Materiality and audit risk
are considered throughout the audit in order to reduce audit risk to an acceptable low
level.
 Deciding tolerable misstatement: The tolerable misstatements is the maximum amount to
which an auditor can accept the errors and conclude that he can provide reasonable
assurance that the financial statements are free from material misstatements. Materiality
helps to decide the tolerable misstatement.
 Evaluating the results and reporting: At the view stage of an audit, the auditor should
evaluate the sufficiency and appropriateness of the evidence obtained, in light of
 materiality. If he finds that the evidence obtained is not sufficient and appropriate, he
may have to carry out additional procedures. If the auditor is unable to obtain sufficient
appropriate audit evidence on a material financial statement assertion, the auditor should
express a modified opinion.

REASONABLE ASURANCE

Refers to the high level of assurance that the auditor is giving here, therefore, sufficient evidence
that the subject matter agrees in all material respects to the agreed criteria is required. Also it
gives a positive assurance, means that in their opinion the subject has prepared in accordance
with the criteria required. Also the deals with the degree of satisfaction of the auditor that the
evidence acquired during auditing backs the declarations embodied in the financial reports.

IMPORTANCESW OF REASONABLE ASSURANCE

It gives directions on the valuation of the soundness and dependability of the financial reports by
auditors.

It also shows the efficiency of internal control by the firms’ management and audits done
internally by internal auditors

It helps to determine negligence and liability of the auditor.

AUDIT EVIDENCE

It is information and facts obtained by the auditor from sources under his own control, from the
organizations’ heads, and a large extent from third parties, which is useful, reliable, and
sufficient enough as a basis of forming an opinion on the true and fair view.

SUFFICIENCY OF AUDIT EVIDENCE

Refers to the quantitative measure of audit evidence credited to evidence that comes from
various sources and enables auditors to remove the element of doubt.

Factors that influence the sufficiency of audit evidence.

 The materiality of the item: if items are material more evidence is gathered to ensure
there is no omission or misstatement
  Audit risk assessment: where the auditor assesses the risk behind more evidence is
gathered to minimize risk exposure
 Audit objective: the audit objective is to detect fraud and errors, more evidence is
gathered, but if it is to prove a real and fair view, less evidence gathered.

In most assurance services the auditor conclusion is expressed in the positive forms, for example
in our opinion (subject matter) conforms, in all material respects, with (criteria). This form of
expression conveys reasonable assurance, which indicates that, given the evidence gathering
procedures and the characteristics of the subject matter, the auditor has obtained sufficient
appropriate evidence.