Determining
Materiality
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“In my opinion these financial
statements present fairly (or give
a true and fair view) in all
material respects, the financial
position of (entity).”
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Determining Materiality
Learning Objective: As a result of this
module you will be familiar with
considerations made when the auditor
determines materiality and will use the
Materiality Assessment form to determine
materiality for a case study.
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Determining Materiality
Planning Stage
Enables auditors to make preliminary judgment of
amounts to consider material and thus guide them
to choose their method of examination carefully, in
order to provide a well-founded opinion of the
accounting as a whole.
Helps determine the mix of tests to be carried out
by the auditor and to identify priorities among
areas of examination
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Determining Materiality
Reporting Stage:
Serves as a measure for evaluating aggregate
of the misstatements uncovered, thus considering
the need for qualification to the audit certificate.
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Determining Materiality
Materiality involves both
quantitative
and
qualitative
considerations.
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Determining Materiality
Materiality refers to the MAXIMUM
AMOUNT OF ERROR WHICH CAN
BE TOLERATED IN THE ACCOUNT
AND STILL NOT AFFECT
DECISIONS OF REASONABLE
USERS.
A matter is regarded as material if
its inclusion or omission or non-
disclosure is likely to distort the
overall view of the accounts.
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Classes of Misstatements
from
Materiality should be determined
the user’s point of view
not from the auditor’s.
This requires auditors to exercise
judgment about the importance of errors or
misstatements to the user of the
accounts. 8
Rule of Thumb:
Any amount less than 5 % is probably not
material
Any amount greater than 10% is likely
material
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Considerations when
Determining Materiality
Value of the Error
Nature of the Error
Context in which transaction occurs
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Considerations when
Determining Materiality
value the
To set materiality by
auditor should attempt to
determine the highest
level of error or
misstatement that might
be tolerated by the perceived
users of the account.
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Considerations when
Determining Materiality
Materiality by Nature arises
in disclosure
requirements where a
higher degree of
accuracy might be expected
than could be derived from
normal materiality by value
considerations.
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Considerations when
Determining Materiality
A matter may be material
because of the context in
which it occurs.
i.e.., considering an item in relation to:
overall view given to the financial statement;
the total of which the error forms a part;
associated items;
corresponding amounts in previous years;
and so on.
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Considerations when
Determining Materiality
The size of the entity --its total expenditures, revenues,
net income, assets, equity, working capital, etc.;
Entity-related factors --whether the entity is new or
well-established, stable or unstable and profitable or
not profitable;
Environmental factors -- industry-related considerations,
capital market conditions and the general state of the economy;
Uncertainty – matters surrounded by uncertainty about the
outcome of future events usually come under more
stringent materiality considerations.
Cost and benefit considerations.
Characteristics of the accounting system or policies used.
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Consider This:
The auditor considers materiality while planning
the audit, conducting the audit, and evaluating
audit results.
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Consider This:
What is the difference between
Individual item materiality and
Aggregate materiality?
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Consider This:
In what way is
materiality
related to audit
risk?
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Consider This:
Why are the relationships
between materiality, audit
risk, and audit evidence
important considerations
when developing the
audit programme?
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Materiality Assessment Form
Base Materiality
Applicable Factor Amount % Amount
Percentage of total expenditures
(usual range is 2% for "small"
entities to 0.5% for "large"
entities)
Percentage of total revenue
(usual range is 2% for "small"
entities to 0.5% for "large"
entities)
Percentage of normalized pre-
tax income (usual range is 5%
for entities with "large" pre-tax
incomes to 10% for entities with
"small" pre-tax incomes)
Percentage of equity (1% often
suggested)
Percentage of assets (0.5%
often suggested)
Other information (base amount)
(please specify)
______________________
Materiality amount to be used (normally the lowest) Rp.
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Thank you for your interest and participation!
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