As a simple example, an expenditure of ten cents on paper is generally immaterial, and, if it were forgotten or recorded incorrectly, then no practical difference would result, even for a very small business. These reporting standards consist of concept of auditing pdf growing number of individual standards.
Framework overrides any specific IFRS. Chapter 3 of the Conceptual Framework deals specifically with the quantitative characteristics of financial information that make it useful to the users of the financial statements. Paragraphs QC6 to QC11 provides guidance to determine when information is relevant and when it is not. Information is said to be material if omitting it or misstating it could influence decisions that users make on the basis of an entity’s financial statements. Put differently, “materiality is an entity-specific aspect of relevance, based on the size, or magnitude, or both,” of the items to which financial information relates.
The IASB has declined to specify a uniform quantitative threshold for materiality, or to predetermine what could be material in a particular situation, because of this entity-specific nature of materiality. In terms of ISA 200, the purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. ISA 320, paragraph A3, states that this assessment of what is material is a matter of professional judgement. The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.
ISA 320, paragraph 10, requires that “planning materiality” be set prior to the commencement of detailed testing. In practice, materiality is re-assessed at least once, during the conclusion of the audit, prior to the issuing of the audit report. This materiality is referred to as “final materiality”. ISA 320, paragraph 11, requires the auditor to set “performance materiality”. It includes materiality that is applied to particular transactions, account balances or disclosures. Paragraph 9 also states that the purpose of setting performance materiality is to reduce the risk that the aggregate total of uncorrected misstatements could be material to the financial statements. The higher the audit risk, the lower the materiality will be set.