Materiality and Misstatements: Two Key Audit Terms – Dennis Gardiner, CPA, Managing Partner

Audit News

Materiality in an Audit
AU-C Section 320, Materiality in Planning and Performing an Audit.

Materiality is subject to the auditor’s professional judgment. We must consider the information needs of the financial statement users as a group.

We apply materiality in (1) planning and performing the audit; (2) evaluating the effect of identified misstatements on the audit; (3) evaluating the effect of uncorrected misstatements, if any, on the financial statements; and (4) forming the opinion in the auditor’s report.

Misstatements (including omissions) are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. Misstatements, for this purpose, include omissions.
Judgments about materiality:

+ are made within the context of surrounding circumstances; nature or size of a misstatement, or both, affects judgments;

+ involve both qualitative and quantitative considerations;

+ are made based on consideration of the common financial information needs of the users as a group. The needs of individual users may vary widely and, therefore, it is not possible to take all of those needs into account.

Misstatements Identified During an Audit
AU-C Section 450, Evaluation of Misstatements Identified During the Audit

We are responsible for evaluating the effect of identified misstatements in an audit and the effect of uncorrected misstatements, if any, on the financial statements. What may cause misstatements include the following:

+ Inaccuracies in gathering or processing data from which the financial statements are prepared;

+ Omission of amounts or disclosures, including inadequate or incomplete disclosures;

+ Disclosures presented in a manner that is not in accordance with the applicable financial reporting framework;

+ Incorrect accounting estimates;

+ Management making:

+ Unreasonable judgments in formulating accounting estimates;

+ Inappropriate selection or application of accounting policies;

+ Inappropriate classification, aggregation, or disaggregation of information;

+ Fraud: fraudulent financial reporting or misappropriation of assets

+ AU-C Section 450 explains how materiality is applied in evaluating the effect of identified misstatements on the audit and the effect of uncorrected misstatements, if any, on the financial statements.

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