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TECHNICAL SUPPORT UPDATE #02-2017

The Concept of Materiality - ISSAIs

A question was raised with PASAI about materiality and it is for this reason a brief mention is made here. 

The concept of materiality is of fundamental importance to both preparers and auditors.  Materiality is a concept that is applied to all audits - financial, compliance and performance audits.   Materiality considerations affect decisions concerning the nature, timing and extent of audit procedures and the evaluation of audit results.  Considerations may include stakeholder concerns, public interest, regulatory requirements and consequences for society.   Therefore materiality should be considered throughout the audit process.  However, there is no universally agreed upon numeric guidelines or specific criteria for determining whether a given fact is material. The determination of overall materiality is not a simple mechanical calculation but it involves the exercise of professional judgment.    

In financial audits, materiality is applied in evaluating the effect of individual misstatements on the audit and of uncorrected misstatements, if any, on the financial statements. In general terms, materiality may be defined as the highest level of misstatement that, in the auditor’s judgment, will be tolerated by the user of the financial statements.  If the decision maker would reach a different decision, if that person was aware of the fact in question, then the fact would be material.   

In performance audits, materiality of an audit topic should have regard to the magnitude of its impacts and consider not only financial (qualitative) but also social and political aspects of the subject matter with the aim to deliver as much added value as possible.  Materiality concerns all aspects of performance audits, such as selection of topics, definition of criteria, evaluation of evidence and documentation and management of the risks of producing inappropriate or low impact audit findings or reports.   Assessments require careful judgment on the part of the auditor. 

In compliance audits, materiality consists of both quantitative and qualitative factors.  In performing compliance audits, materiality is determined for: (a) planning purposes (b) purposes of evaluating the evidence obtained and the effects of identified instances of non-compliance and (c) purposes of reporting the results of the audit work. 

Resources: ISSAI100 Fundamental Principles of Public Sector Auditing

ISSAI 200 Fundamental Principles of Compliance Auditing

ISSAI 300 Fundamental Principles of Performance Auditing

ISSAI 1320 Materiality in Planning and Performing an Audit

ISSAI 1450 Evaluation of Misstatements Identified during the Audit

ISSAI 3000-3100 Performance Audit Guidelines

ISSAI 4000-4100 Compliance Audit Guidelines

The Concept of Materiality – GAGAS

According to paragraph 4.47 of Materiality in GAGAS Financial Audits of the Yellow Book (2011 edition) the AICPA standards require the auditor to apply the concept of materiality appropriately in planning and performing the audit.  There may be additional considerations that may apply to GAGAS financial audits of government entities or entities that receive federal funds or government awards.  For example, in audits performed in accordance with GAGAS, auditors may find it appropriate to use lower materiality levels as compared with the materiality levels used in non-GAGAS audits because of the public accountability of government entities, and entities receiving government funding, various legal and regulatory requirements, and the visibility and sensitivity of government programmes.

In summary, the determination of materiality is a matter for professional judgment and these are skills that an auditor will develop with experience.  

Finally, in the previous Technical Update #01/2017 you were alerted to Professional Standards Update No.66 issued 19 January 2017 issued by US GAO.  There are no updates for February 2017.