Wiley Practitioner's Guide to GAAS 2020. Joanne M. Flood
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Название: Wiley Practitioner's Guide to GAAS 2020
Автор: Joanne M. Flood
Издательство: John Wiley & Sons Limited
Жанр: Бухучет, налогообложение, аудит
isbn: 9781119596035
isbn:
OBJECTIVE OF AU-C SECTION 320
The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit.
(AU-C Section 320.08)
OVERVIEW
The concept of materiality recognizes that some matters are more important for the fair presentation of the financial statements than others. In performing the audit, the auditor is concerned with matters that, individually or in the aggregate, could be material to the financial statements. The auditor’s responsibility is to plan and perform the audit to obtain reasonable assurance that the auditor detects all material misstatements, whether caused by error or by fraud.
The FASB’s Conceptual Framework Concept No. 8 says that:
The omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.
This definition is consistent with the definition used by the SEC, the PCAOB, the AICPA, and the U.S. judicial system.
Materiality is entity-specific and is based on the nature and/or magnitude of the item in the context of an individual entity’s financial report. Thus, materiality is influenced by the auditor’s perception of the needs of financial statement users who will rely on the financial statements to make economic decisions. (AU-C 320.04) Specific needs of users may vary widely, and those are not considered.
Materiality and Audit Risk
Audit risk is the risk that the financial statements are materially misstated and the auditor expresses an inappropriate audit opinion. The auditor must perform the audit to reduce audit risk to a low level. Audit risk is a function of two components:
1 Risk of material misstatement, which is the risk that the financial statements are materially misstated prior to the audit, and
2 Detection risk, which is the risk that the auditor will not detect such misstatements.
The model AR = Risk of material misstatement (RMM) × Detection risk (DR) expresses the general relationship of audit risk and the risks associated with the auditor’s assessment risk of material misstatement (inherent and control risks) and detection risk. (AU-C 320.A1)
Reducing audit risk to a low level requires the auditor to:
1 Assess the risk of material misstatement and, based on that assessment,
2 Design and perform further audit procedures to reduce overall audit risk to an appropriately low level.
The auditor must consider materiality and audit risk during the audit, especially when:
Determining the nature and extent of risk assessment procedures
Identifying and assessing the risks of material misstatements
Determining the nature, timing, and extent of further audit procedures
Assessing the effect of uncorrected misstatements on the financial statements and auditor’s opinion
(AU-C 320.A1)
REQUIREMENTS
Determining Materiality and Performance Materiality
In considering audit risk at the overall financial statement level, the auditor should consider risks of material misstatement that relate pervasively to the financial statements taken as a whole and often potentially relate to many assertions. It is also possible that specific classes of transactions, account balances, or disclosures may exist for which misstatements at a lower amount than the materiality of the financial statements taken as a whole may influence the decisions of users, so the auditor must determine the materiality level for those items. (AU-C 320.10)
Making a Judgment about Materiality When Planning the Audit
When making a judgment during the planning phase about the amount to be considered material to the financial statements, the auditor should first recognize the nature of this amount. It is an allowance or “cushion” for undetected or uncorrected misstatements remaining in the financial statements after all audit procedures have been applied. The auditor’s goal is to plan audit procedures so that if misstatements exceed this amount, there is a relatively low risk of failing to detect them.
It is usually efficient and effective to estimate a single dollar amount to be used in planning the audit. Since the amount is to be used as an aid in planning the scope of auditing procedures, use of a general benchmark is both practical and acceptable. (AU-C 320.A5) For example, many auditors use 5% to 10% of before-tax income or 0.5% to 1% of the larger of total assets or total revenues. Adoption of a benchmark requires consideration of the appropriate base and the percentage of that base to be used to make the calculation.
Determining materiality in the planning phase is a matter of professional judgment. Typically, auditors apply a percentage to an appropriate basis (e.g., total revenues, total assets, etc.) as a starting point for determining materiality. When identifying an appropriate benchmark, the auditor may consider:
How the users use the entity’s financial statements to make decisions
The nature of the entity and the industry in which it operates
The size of the entity, the nature of its ownership, and the way it is financed
The elements of the financial statements
The entity’s ownership and financing structures
The reliability of the benchmark
(AU-C 320.A5)
Determining the Base
If the current financial statements are available, amounts from these statements may be used, or interim financial statements may be annualized. However, if significant audit adjustments are expected, an average from prior financial statements may be used. When historical data are used, the auditor should adjust the data for unusual items that affected prior years and for any known changes that can be expected to affect the current period. (AU-C 320.A7)
Usually a single base is necessary because the auditor expresses an opinion on the financial statements taken as a whole rather than on individual financial statements. The most common bases for materiality judgments are:
Profit before tax
Total revenues
Net СКАЧАТЬ