Hanrick Curran Audit Training - Materiality - April 2013


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Training for assessing materiality as part of audit planning. Designed for intermediate to senior level staff and based on Australian Auditing Standard ASA 320. Also refers to AASB 1031 Materiality, which is an Australian Accounting Standard

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Hanrick Curran Audit Training - Materiality - April 2013

  1. 1. Audit Training - Materiality - April 2013Materiality & related conceptsApril 2013
  2. 2. This document contains information in summary form and is therefore intendedfor general guidance only. It is not intended to be a substitute for detailedresearch or the exercise of professional judgement. It does not purport to becomprehensive or to render professional advice. The reader should not act onthe basis of any matter contained in this publication without first obtainingspecific professional advice.We believe that the statements made by us in this document are accurate but nowarranty of accuracy or reliability is given. Our conclusions are based oninterpretations of accounting standards and other relevant professionalpronouncements and legislation current as at the date of this document. Shouldthe interpretations, accounting standards, other relevant professionalpronouncements or legislation change, our conclusions may not be valid. We areunder no obligation to update the matters considered in this document after itspublication.© Hanrick Curran, April 2013All rights reservedDisclaimerLiability limited by a scheme approved underprofessional Standards Legislation
  3. 3. Your Presenters – Matthew Green CA– Wendy Low CAContact details: matthew.green@hanrickcurran.com.au0447 724 595(07) 3218 3900Twitter: @matthewjgreencaLinkedIn: http://au.linkedin.com/in/matthewjgreencaWeb: www.hanrickcurran.com.auAudit Training - Materiality - April 2013
  4. 4. Objectives for today• A refresher in GAAP & GAAS requirements for materiality.• Overview of practical issues in setting materiality• A look at recent issues• Some pointers on common mistakes• An example to work throughWe will not cover applied topics such as errors & restatements and estimates & judgmentsAudit Training - Materiality - April 2013
  5. 5. MaterialityAn accounting standard first and an audit standard second!“Information is material if its omission, misstatementor non-disclosure has the potential, individually orcollectively, to:(a) influence the economic decisions of users takenon the basis of the financial statements; or(b) affect the discharge of accountability by themanagement or governing body of the entity.”(source: AASB 1031 MaterialityAudit Training - Materiality - April 2013
  6. 6. Auditors definition of materiality4. The auditors determination of materiality is a matter of professional judgement,and is affected by the auditors perception of the financial information needs of users ofthe financial report. In this context, it is reasonable for the auditor to assume that users:(a) Have a reasonable knowledge of business and economic activities and accounting and awillingness to study the information in the financial report with reasonable diligence;(b) Understand that the financial report is prepared, presented and audited to levels ofmateriality;(c) Recognise the uncertainties inherent in the measurement of amounts based on the useof estimates, judgement and the consideration of future events; and(d) Make reasonable economic decisions on the basis of the information in the financialreport.(Source: ASA 320 Materiality in Planning and Performing an Audit)Audit Training - Materiality - April 2013
  7. 7. Materiality is typicallyassessed at two levels:Overall Materiality(for the financial statementsas a whole)Specific Materiality(for particular classes oftransactions or disclosures)(Source: IFAC)Audit Training - Materiality - April 2013
  8. 8. Concepts of materialityPerformance Materiality Is set lower than overallmateriality Provides the auditor witha safety buffer inconducting testing toallow for undetectedmisstatementsDe minimis (posting threshold) Derives from legalprincipal of “de minimisnon curat lex” The law does not concernitself with immaterialmatters Under ASA 450.A2, theauditor may set athreshold foraccumulating errorsAudit Training - Materiality - April 2013
  9. 9. Materiality is usually set on a base, which might be:Net ProfitAfter TaxRevenueAssets EquityAudit Training - Materiality - April 2013As materiality is a matter of professionaljudgement, the selection of a base forassessing materiality should be discussed withthe lead auditor before work commences.The selection of a basis for setting materialityis dependent on: The nature of the entity Relevant financial statements elements Specific user expectations Adjustments required Primary focus of users Volatility of basis Alternative benchmarksSource: ICAA Audit Manual, p316
  10. 10. Typical bases might be:Net ProfitAfter TaxRevenueAssets EquityAudit Training - Materiality - April 2013Materiality is a matter of professional judgmentrather than a mechanical exercise. As a result,no specific guidance is provided in the ISA.However, profit from continuing operations (3to 7%) is often used in practice as having thegreatest significance to financial statementusers. If this is not a useful measure (such asfor a not-for-profit entity or where profit is not astable base), then consider other bases suchas:• Revenues or expenditures 1 to 3%;• Assets 1 to 3%; or• Equity 3 to 5%.(Source: IFAC Guide, Vol. 2, p61)See also: Hanrick Curran Materiality Memorandum handout
  11. 11. Common rules of thumb for selecting a baseProfitable listed company – almost always use NPATCompany with trading losses or volatile net profits – maybe use revenueas a “stable base”Asset rich entity (i.e., charity or government entity) – either assets, equityor revenueAudit Training - Materiality - April 2013
  12. 12. Errors (ASA 450)When assessing errors: Consider against quantitative materiality guidelines Consider qualitative aspects of errors – does it affect a key ratio or debtcovenant Consider what type of error is it? (judgemental, known factual orprojected error)Audit Training - Materiality - April 2013
  13. 13. More guidance is available at:ICAA Australian Audit Manual (2010)IFAC Guide to Using ISAs in the Audits of Small and Medium SizedEntities (2011)ASA/ISA 320 Materiality in Planning and Performing an AuditAudit Training - Materiality - April 2013
  14. 14. Audit Training - Materiality - April 2013Questions?www.hanrickcurran.com.auHanrick Currant. (07) 3218 3900f. (07) 3218 3901Level 11307 Queen StreetBrisbane Qld 4000GPO Box 2268Brisbane Qld 4001
  15. 15. About Hanrick CurranOur client base is mainly located in South EastQueensland, but also extends to Northern NewSouth Wales, Western Queensland, Sydney,Melbourne, Darwin, Townsville and Mackay as wellas other regional areas.We have a strong position with clients in PapuaNew Guinea and we also serve a growing Asianbusiness sector. While these internationalconnections may not be of immediate interest butwe believe they are important in enabling us toeffectively serve our clients.Hanrick Curran’s Client BaseAudit Training - Materiality - April 2013
  16. 16. Audit Training - Materiality - April 2013Thank youwww.hanrickcurran.com.auHanrick Currant. (07) 3218 3900f. (07) 3218 3901Level 11307 Queen StreetBrisbane Qld 4000GPO Box 2268Brisbane Qld 4001