• 6 Marks

AA – May 2020 – L2 – Q2a – Audit Failure and Expectation Gap

Define the concept of materiality in the context of an audit.

ISA 320: Materiality in Planning and Performing an Audit explains the concept of materiality and how it is used by the auditor in engagement to reach important conclusions regarding procedures and evidence obtained. The concept of materiality is a core concept in risk-based audit approaches.

Required:
i) Explain materiality. (2 marks)

ii) Briefly assess FOUR (4) ways materiality impacts an audit. (4 marks)

i)

Misstatements or omissions are generally considered material, individually or in aggregate, if they can reasonably be expected to influence the economic decisions of users based on the financial statements. Materiality depends on the size of the omission or misstatement, judged in its particular circumstances. It provides a threshold or cutoff point rather than being a primary qualitative characteristic that information must have to be useful.

(2 marks)

ii

The four ways materiality impacts an audit are as follows:

  • Selection of Audit Items: Materiality helps auditors determine which items to test, as material items must undergo substantive procedures.
  • Sampling Decisions: Materiality helps auditors decide whether to use sampling; for example, if all items in a population are material, sampling may not be appropriate.
  • Audit Opinion Formation: Materiality assists in determining what level of misstatement will result in a modified audit opinion.
  • Reassessment During Audit: Materiality is calculated during the planning stage and must be reassessed throughout the audit to ensure it reflects the conditions at the reporting date.

(4 marks)

Back to all questions

Pick a Form

Professional Tutor Application Form
Academic Tutor Application Form
Student Tutor Application Form