Materiality in Auditing ISA

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 Can be described as an expression of relevant significance
or importance of a matter in the context of financial
statements as a whole
 A matter is material if its omission or misstatement would
reasonably influence the economic decisions of users taken
on the basis of financial statements
 Is effect of information on an opinion of a decision, degree
of substance, degree of significance
 The auditor should consider materiality and its relationship
with audit risk when conducting an audit.
 Materiality depends on the size of the item or error judged
in the particular circumstances of its omission or
misstatement.
 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 frame work.
 The assessment of what is material is a matter of professional
judgement. 
 In designing the audit plan the auditor establishes an acceptable materiality level
so as to detect qualitatively material misstatements.
 However, both the amount (quantity) and nature (quality) of misstatements need
to be considered for example failure to disclose the breach of regulatory
requirements when it is likely that the imposition of regulatory restrictions will
significantly impair operating capability.
 The auditor needs to consider the possibility of misstatements of relatively small
amounts that cumulatively could have a material effect on financial statements.
 The auditor considers materiality at both the overall financial statement level and
in relation to classes of transactions, accounting balances and disclosures.
 Materiality should be considered by the auditor when determining the nature,
timing and extent of audit procedures, and evaluating the effects of
misstatements.
 In looking at materiality the auditor will consider the following
i) The size of the item in relation to the total
ii)The nature of the item 
• Materiality should be considered when the auditor is determining the
nature, timing and extent of audit procedures and when evaluating the
effects of misstatement s
• In evaluating the fair presentation of financial statements, the auditor
should asses the aggregate of uncorrected misstatements that have been
identified during the audit to consider if the statements are material
Relationship between materiality and audit risk.

 There is an inverse relationship between materiality and the level of

audit risk.
 The higher the materiality level the lower the audit risk and vice versa.
 When planning for specific audit procedures, if the auditor determines
that the acceptable materiality level is lower, audit risk is increased.
 The auditor would compensate for this by:
 
 (a) reducing the assessed risk of material misstatement 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.
Evaluating the effects of misstatements

 The auditor should assess whether the aggregate of uncorrected misstatements that had
been identified during the audit is material. 
 The aggregate of uncorrected misstatements comprises:
 specific misstatements identified by the auditor. 
 the auditor’s best estimate of other misstatements which cannot be specifically identified.
 If the auditor concludes that the misstatement may be material, the auditor needs to
consider reducing audit risk by extending audit procedures or requesting management to
adjust the financial statements.
 If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatement is not material, the auditor should consider appropriate modification of the
auditor’s report.