Part 2: What is materiality?, Who determines materiality?
Part 3: How materiality is determined?
Part 4: Timing of determination and how, Revision during audit engagement, Documentation
1 What is Materiality?
At the very heart of assurance engagement lies the concept of materiality. Auditor applies materiality concept to complete different aspects of engagement ranging from gather evidence, interpreting results, planning, risk assessment, sample selection and designing, finalizing audit and giving opinion in audit report including the following specifically:
- Assessing the inherent risk and the possibility and the extent to which such risks can translate into material misstatements
- Designing audit procedures to cater such assessed risk to reduce the audit risk to an acceptably low level
- Estimating the effect of uncorrected misstatements and finally giving opinion in auditor’s report
Hence, without materiality auditor doing audit will be wandering in a cave of coal.
2 Who determines materiality?
In audit engagement auditor determines the materiality by exercising his professional judgment.
Materiality level acts as a filter that catches such misstatements that may affect financial statements materially. However, auditor determines materiality level and detects material misstatements not to provide service to entity rather to reduce audit risk to an appropriately low level. And only by reducing audit risk to reasonable level he can provide reasonable assurance and state opinion in auditor’s report.