CFAP-06 Quick Revision Guide Trainer: Bilal Qureshi, ACA, FCCA
ISA 320 - MATERIALITY
1. Misstatements / omissions (individually or in aggregate) (quantitative / qualitative)
What is materiality?
2. Expected to INFLUENCE
(P2)
3. ECONOMIC DECISIONS OF USERS taken on the basis of FS
Assumptions of auditor about users and their understanding when exercising judgement for determining
materiality are as follows:
Materiality
1. Reasonable business/accounting knowledge and study FS with reasonable diligence
determination -
2. FS prepared on materiality concept
Judgmental matter (P4)
3. Uncertainties such as estimates
4. Reasonable economic decisions
Application of Planning: Risk assessment
materiality concept Performing: Further AP
(P5) Finalization and Reporting: evaluation of misstatements (identified & uncorrected) including opinion
Determination of Materiality and Performance Materiality [Shall be documented along with factors in their determination]
Materiality for FS as a whole (per ISA) = Overall materiality (OM) = Planning materiality (PM)
Step 1 (P10) Remember: Materiality relates to the FS on which the auditor is reporting. E.g. due to change in year end or
new entity, financial period may be more or less than 12 months (A7)
Determine a LOWER Materiality (lower than OM) for specific FSLIs / disclosures
Step 2 [If applicable]
Depends on: law, reg, FRFW, industry, specific business that necessitates setting a lower materiality level such
(P10 & A11)
as specific items in FS e.g. research cost in pharma business or RPT
Determine Performance Materiality (PM) [for risk assessment and further AP] and a lower PM for certain items
in FS (similar to step 2 above) - Loosely speaking termed as working materiality
What is PM?
lower amount as compared to OM to reduce the risk of aggregate uncorrected/undetected misstatements
Step 3 (P9 & P11)
exceeding OM
PM depends on:
Current period's risk assessment procedures, past & expected misstatements based on ICFR, audit risk and
business changes
HOW TO DETERMINE MATERIALITY
Usual method of Materiality = Benchmark*Chosen percentage (%)
determination (A4)
Popular Benchmarks
PBT, total revenues, total expenses, CFFO, Net assets
available (A5)
1. Elements of FS (assets/liabilities/income/expenses)
2. Focus of user attention such as PBT for listed companies, total revenues / expenses for loss making, public
sector, CFFO for banks, net assets for mutual funds etc.
3. Entity, industry and external environment and entity's stage in lifecycle - such as PBT may be unsuitable for
Factors in selecting
start ups
benchmark (A4)
4. Entity's capital structure (debt vs equity) such as assets for high geared entities and profit before
remuneration and tax for owner managed
5. Relative volatility of benchmark - e.g. when PBT volatile use other suitable benchmarks such as revenue or a
normalized profit figure based on past results
Sources of relevant Prior period or period to date financial results or budgets adjusted for significant changes in entity/environment
financial data for a
chosen benchmark
(A6)
Judgement, % linked to chosen benchmark such as higher % for PBT compared to revenue
PBT - 5%
Revenue – 1% to 5%
Chosen % (A8) Total assets – Upto 1%
Net Assets – Upto 3%
Expenses – 3% to 5%
CFFO – 3% to 5%
28
CFAP-06 Quick Revision Guide Trainer: Bilal Qureshi, ACA, FCCA
REVISION OF MATERIALITY [Shall be documented along with factors in their determination]
What situations require Changed circumstances, new information, change in auditor's understanding of entity when AP performed (if
revision? (P12) actual results significantly different than expected results used for materiality determination earlier)
A rule to remember for Whenever OM revised (both step 1 & 2), auditor SHALL DETERMINE whether PM and AP needs revision.
revisions (P13)
29
