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Would it be true in general to say that if you have an audit assignment with about a normal level audit risk you would set materiality at, using PBT of 100m for example, between 5% and 10%, so 5m – 10m. And if you have an assignment with a little higher audit risk than that (with the same PBT level) you would then set materiality a bit lower, say 3m – 8m. And an assignment with a bit lower audit risk then materiality set a bit higher, at say 8m -13m?
Thank you.You are thinking in the right direction – the higher the risk, the lower the monetary amount of materiality.
But remember that materiality depends on DETECTION risk rather than audit risk (which is usually 5% for all audits) – see page 51 of the notes.
If AR is 5%, IR is assessed as 100% (i.e. high) and CR is assessed as 100% (i.e. ineffective controls) then DR must be “rendered” (i.e. made) low – to 5%. This would be achieved by setting materiality at lower $x amounts.
If AR is 5, IR is assessed at a 75%, (i.e. moderately high) and CR is assessed at 20% (i.e. relatively low because controls are good) then DR is 33% (rearranging 0.05 = 0.75 × 0.2 × DR). This means that the levels of substantive tests planned should be adequate, even if there is a 33% chance that they fail to detect material errors or omissions. So $x materiality will be higher.
So if PBT is £100m then the range is £5m – £10m, and then if the IR and CR is low you would set it at closer to £10m, and if the IR and CR are high you would set it at closer to £5m, yes?
Thank you.Don’t think of materiality in ranges like this. You are given $x and you calculate it to be 3% of profit – clearly not material – or it is 12% of profit – clearly material. 5-10% is the “grey area” in between when it may or may not material. But for AAA assume anything in this range to be potentially material so that you have something to write about it – rather than dismiss it as immaterial.
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