Hanrick Curran Audit Training - Materiality - April 2013

Audit Training - Materiality - April 2013

Materiality & related concepts

April 2013

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 2013All rights reserved

Disclaimer

Liability limited by a scheme approved under professional Standards Legislation

Your Presenters – Matthew Green CA– Wendy Low CA

Contact details: [email protected]

0447 724 595

(07) 3218 3900

Twitter: @matthewjgreenca

LinkedIn: http://au.linkedin.com/in/matthewjgreenca

Web: www.hanrickcurran.com.au


http://au.linkedin.com/in/matthewjgreenca

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


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

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)


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)


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


Materiality is usually set on a base, which might be:

Net Profit After Tax Revenue

Assets Equity


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

Typical bases might be:

Net Profit After Tax Revenue

Assets Equity


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 thegreatest 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

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


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)


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



Questions?

www.hanrickcurran.com.au

Hanrick Currant. (07) 3218 3900f. (07) 3218 3901

Level 11307 Queen StreetBrisbane Qld 4000

GPO Box 2268Brisbane Qld 4001

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



Thank you

www.hanrickcurran.com.au

Hanrick Currant. (07) 3218 3900f. (07) 3218 3901

Level 11307 Queen StreetBrisbane Qld 4000

GPO Box 2268Brisbane Qld 4001

Business

Hanrick Curran Audit Training - Materiality - April 2013