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I am having a hard time trying to grasp the concept of materiality.
So far, this is what I understand. Materiality of transactions/disclosures are a matter of professional judgement i.e it depends on the nature, size, value or the impact it has on the financial statement. Clearly, it varies from case to case (or client to client) basis.
Example: When we decide the materiality of a transaction, say an asset to be 1% of the total asset value. Any misstatement above this threshold of materiality will be significant to the financial statement? In order to corroborate our materiality assessment, we still need to conduct test and ‘check’ on the transaction. Am I correct? Cause I am starting to get really lost from this point onward.
where does performance materiality fit into all this? and why the level of tolerable misstatement?
Whenever we suspect there is a material misstatement, we must follow up our suspicions and confirm in our own minds the apparent materiality of the matter
It will often be the case that a discussion with management and / or those charged with governance will result in amendments being made by the client or re-assurances being received from the client
Where there remain unresolved matters that exceed (in aggregate) our self-calculated materiality level, this situation will result in a modified audit opinion
Re performance materiality, here’s an answer from Ken 5 years ago on the F8 forum:
“Well, let’s say you had determined that 10,000 was the materiality level for assets. If a receivable balance were wrong by more than that then the possibility of a material misstatement has to be considered, and the error has to be noted by the audit team for consideration by the partner.
However, what if receivables were overstated by 8,000 and non-current assets overstated by 8,000 and liabilities understated by 8,000? These errors add up to $24,000 ALL IN THE SAME DIRECTION. Therefore, materiality is set at a lower level just in case such a scenario occurs”
Tolerable misstatement is the level of error that the auditor considers to have no material impact on the view shown by the financial statements
OK?
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