Audit Risk

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INTERNATIONAL STANDARD ON AUDITING 320 AUDIT MATERIALITY
(This Standard is effective, but contains conforming amendments that become effective at a future date)*

CONTENTS
Paragraph Introduction ................................................................................................... Materiality ..................................................................................................... The Relationship Between Materiality and Audit Risk ................................. Evaluating the Effect of Misstatements ......................................................... 1-3 4-8 9-11 12-16

International Standard on Auditing (ISA) 320, “Audit Materiality” should be read in the context of the “Preface to the International Standards on Quality Control, Auditing, Assurance and Related Services,” which sets out the application and authority of ISAs. The Audit Risk Standards

the Risks of Material Misstatement,” ISA 330, “The Auditor’s Procedures in Response to Assessed Risks,” and ISA 500 (Revised), “Audit Evidence,” gave rise to conforming amendments to ISA 320. These amendments are effective for audits of financial statements for periods beginning on or after December 15, 2004.

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ISA 320 (CONFORMED)

AUDIT MATERIALITY (CONFORMED)

Introduction
1. The purpose of this International Standard on Auditing (ISA) is to establish standards and provide guidance on the concept of materiality and its relationship with audit risk. The auditor should consider materiality and its relationship with audit risk when conducting an audit. “Materiality” is defined in the International Accounting Standards Board’s Committee’s “Framework for the Preparation and Presentation of Financial Statements” in the following terms: “Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.”

2. 3.

Materiality
4. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable identified financial reporting framework. The assessment of what is material is a matter of professional judgment. In designing the audit plan, the auditor establishes an acceptable materiality level so as to detect quantitatively material misstatements. However, both the amount (quantity) and nature (quality) of misstatements need to be considered. Examples of qualitative misstatements would be the inadequate or improper description of an accounting policy when it is likely that a user of the financial statements would be misled by the description, and failure to disclose the breach of regulatory requirements when it is likely that the consequent imposition of regulatory restrictions will significantly impair operating capability. The auditor needs to consider the possibility of misstatements of relatively small amounts that, cumulatively, could have a material effect on the financial statements. For example, an error in a month end procedure could be an indication of a potential material misstatement if that error is repeated each month. The auditor considers materiality at both the overall financial statement level and in relation to individual account balances, classes of transactions, account balances, and disclosures. Materiality may be influenced by considerations such as legal and regulatory requirements and considerations relating to classes of transactions, account balances, and disclosures and their relationships

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ISA 320 (CONFORMED)

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AUDIT MATERIALITY (CONFORMED)

individual financial statement...
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