Training for assessing materiality as part of audit planning. Designed for intermediate to senior level staff and based on Australian Auditing Standard ASA 320. Also refers to AASB 1031 Materiality, which is an Australian Accounting Standard

1. Audit Training - Materiality - April 2013
Materiality & related concepts
April 2013

2. This document contains information in summary form and is therefore intended
for general guidance only. It is not intended to be a substitute for detailed
research or the exercise of professional judgement. It does not purport to be
comprehensive or to render professional advice. The reader should not act on
the basis of any matter contained in this publication without first obtaining
specific professional advice.
We believe that the statements made by us in this document are accurate but no
warranty of accuracy or reliability is given. Our conclusions are based on
interpretations of accounting standards and other relevant professional
pronouncements and legislation current as at the date of this document. Should
the interpretations, accounting standards, other relevant professional
pronouncements or legislation change, our conclusions may not be valid. We are
under no obligation to update the matters considered in this document after its
publication.
© Hanrick Curran, April 2013
All rights reserved
Disclaimer
Liability limited by a scheme approved under
professional Standards Legislation

3. Your Presenters – Matthew Green CA
– Wendy Low CA
Contact details: matthew.green@hanrickcurran.com.au
0447 724 595
(07) 3218 3900
Twitter: @matthewjgreenca
LinkedIn: http://au.linkedin.com/in/matthewjgreenca
Web: www.hanrickcurran.com.au
Audit Training - Materiality - April 2013

4. Objectives for today
• A refresher in GAAP & GAAS requirements for materiality.
• Overview of practical issues in setting materiality
• A look at recent issues
• Some pointers on common mistakes
• An example to work through
We will not cover applied topics such as errors & restatements and estimates & judgments
Audit Training - Materiality - April 2013

5. Materiality
An accounting standard first and an audit standard second!
“Information is material if its omission, misstatement
or non-disclosure has the potential, individually or
collectively, to:
(a) influence the economic decisions of users taken
on the basis of the financial statements; or
(b) affect the discharge of accountability by the
management or governing body of the entity.”
(source: AASB 1031 Materiality
Audit Training - Materiality - April 2013

6. Auditors definition of materiality
4. The auditor's determination of materiality is a matter of professional judgement,
and is affected by the auditor's perception of the financial information needs of users of
the financial report. In this context, it is reasonable for the auditor to assume that users:
(a) Have a reasonable knowledge of business and economic activities and accounting and a
willingness to study the information in the financial report with reasonable diligence;
(b) Understand that the financial report is prepared, presented and audited to levels of
materiality;
(c) Recognise the uncertainties inherent in the measurement of amounts based on the use
of estimates, judgement and the consideration of future events; and
(d) Make reasonable economic decisions on the basis of the information in the financial
report.
(Source: ASA 320 Materiality in Planning and Performing an Audit)
Audit Training - Materiality - April 2013

7. Materiality is typically
assessed at two levels:
Overall Materiality
(for the financial statements
as a whole)
Specific Materiality
(for particular classes of
transactions or disclosures)
(Source: IFAC)
Audit Training - Materiality - April 2013

8. Concepts of materiality
Performance Materiality
 Is set lower than overall
materiality
 Provides the auditor with
a safety buffer in
conducting testing to
allow for undetected
misstatements
De minimis (posting threshold)
 Derives from legal
principal of “de minimis
non curat lex”
 The law does not concern
itself with immaterial
matters
 Under ASA 450.A2, the
auditor may set a
threshold for
accumulating errors
Audit Training - Materiality - April 2013

9. Materiality is usually set on a base, which might be:
Net Profit
After Tax
Revenue
Assets Equity
Audit Training - Materiality - April 2013
As materiality is a matter of professional
judgement, the selection of a base for
assessing materiality should be discussed with
the lead auditor before work commences.
The selection of a basis for setting materiality
is dependent on:
 The nature of the entity
 Relevant financial statements elements
 Specific user expectations
 Adjustments required
 Primary focus of users
 Volatility of basis
 Alternative benchmarks
Source: ICAA Audit Manual, p316

10. Typical bases might be:
Net Profit
After Tax
Revenue
Assets Equity
Audit Training - Materiality - April 2013
Materiality is a matter of professional judgment
rather than a mechanical exercise. As a result,
no specific guidance is provided in the ISA.
However, profit from continuing operations (3
to 7%) is often used in practice as having the
greatest significance to financial statement
users. If this is not a useful measure (such as
for a not-for-profit entity or where profit is not a
stable base), then consider other bases such
as:
• Revenues or expenditures 1 to 3%;
• Assets 1 to 3%; or
• Equity 3 to 5%.
(Source: IFAC Guide, Vol. 2, p61)
See also: Hanrick Curran Materiality Memorandum handout

11. Common rules of thumb for selecting a base
Profitable listed company – almost always use NPAT
Company with trading losses or volatile net profits – maybe use revenue
as a “stable base”
Asset rich entity (i.e., charity or government entity) – either assets, equity
or revenue
Audit Training - Materiality - April 2013

12. Errors (ASA 450)
When assessing errors:
 Consider against quantitative materiality guidelines
 Consider qualitative aspects of errors – does it affect a key ratio or debt
covenant
 Consider what type of error is it? (judgemental, known factual or
projected error)
Audit Training - Materiality - April 2013

13. More guidance is available at:
ICAA Australian Audit Manual (2010)
IFAC Guide to Using ISAs in the Audits of Small and Medium Sized
Entities (2011)
ASA/ISA 320 Materiality in Planning and Performing an Audit
Audit Training - Materiality - April 2013

14. Audit Training - Materiality - April 2013
Questions?
www.hanrickcurran.com.au
Hanrick Curran
t. (07) 3218 3900
f. (07) 3218 3901
Level 11
307 Queen Street
Brisbane Qld 4000
GPO Box 2268
Brisbane Qld 4001

15. About Hanrick Curran
Our client base is mainly located in South East
Queensland, but also extends to Northern New
South Wales, Western Queensland, Sydney,
Melbourne, Darwin, Townsville and Mackay as well
as other regional areas.
We have a strong position with clients in Papua
New Guinea and we also serve a growing Asian
business sector. While these international
connections may not be of immediate interest but
we believe they are important in enabling us to
effectively serve our clients.
Hanrick Curran’s Client Base
Audit Training - Materiality - April 2013

16. Audit Training - Materiality - April 2013
Thank you
www.hanrickcurran.com.au
Hanrick Curran
t. (07) 3218 3900
f. (07) 3218 3901
Level 11
307 Queen Street
Brisbane Qld 4000
GPO Box 2268
Brisbane Qld 4001