Materiality when auditing

1. AUDIT MATERIALITY
DEEN & COMPANY (Chartered Accountants)

2. PRESENTATION
OUTLINE
 Introduction
 Overall Materiality
 Performance Materiality
 Deminis level/SUM/Trivial
 Conclusion
D & C (Chartered Accountants)
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3. Introduction
 Materiality is the magnitude of an omission or
misstatement of accounting information that influence
the economic decisions of users of the financial
statements.
 Three types
 Overall Materiality
 Performance Materiality
 De minimis / SUM posting level
 At the planning stage of the audit
 The initial materiality levels are determined based on
Management accounts.
 Do the initial analytics of FSLIs based on the
performance materiality.
D & C (Chartered Accountants)
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4. Introduction
(continued)
 At the Execution stage of the audit
 Apply the performance materiality (PM) level to
determine the sample size. (Here the PM is applied and
the balances are checked for the amounts over the PM
amount).
 PM is applied to each Financial Statement Line Items
(FSLI) once. (Here PM may be disaggregated
proportionately within each FSLI to ease auditing).
 Material by nature (professional judgement)
 At the Completion stage of the audit
 The revised PM is used after passing all the audit
entries.
 Used in performing Conclusion analytic (where current
audited figures are compared with the previous year
audited figures).
D & C (Chartered Accountants)
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5. Overall
Materiality
 Overall Materiality
 Used to determine if the financial statements as a whole
are fairly stated.
 Normally calculated based on the following:
 0.5% to 1% of gross revenue.
 1% to 2% of total assets.
 1% to 2% of gross profit.
 2% to 5% of Shareholders’ equity.
 5% to 10% of net profit.
D & C (Chartered Accountants)
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6. Performance
Materiality(PM)
 Performance Materiality
 Used to design further audit procedures at the FSLI or class
of transaction level or for disclosures. This is to allow for the
possibility that uncorrected and undetected misstatements of
individual FSLIs could in aggregate exceed the overall
materiality threshold.
 Applicability
 Normally when we are calculating PM, we do a “haircut” to
the Overall materiality (normally 25%) and consider the net
amount as PM i.e. If we assume LKR 100 as OM, the PM
would be [100-25= 75]
 Normally PM is the amount used to skip the figures when
auditing.
 The auditor should use a proper sampling technique to
effectively and efficiently perform the audit.
 The amount to be skipped is a matter of professional
judgement.
D & C (Chartered Accountants)
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7. Deminimis/
SUMposting
level
 De minimis / SUM posting level
 Used to determine which identified misstatements
exceed the “clearly trivial” level and need to be
accumulated.
 Applicability
 Normally De minimis level is used to decide whether the
identified misstatement should be adjusted in the
financial statements.
 Normal percentage of trivial amount calculated based on
OM is 10%. i.e. If the OM is LKR 100, the De minimis
amount is [100*10%= LKR 10].
D & C (Chartered Accountants)
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8. Conclusion
 The Engagement team shall accumulate the
misstatements identified during the audit (except for
those that are clearly trivial) onto the summary of
uncorrected misstatements (SUM) and assess whether
or not the impact on the financial statements is
material. We should also include misstatements
identified by the engagement team which were
corrected by the client.
D & C (Chartered Accountants)
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9. D & C (Chartered Accountants)
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