SA 320 MATERIALITY IN PLANING & PERFORMING THE AUDIT

HI let us discuss SA 320 MATERIALITY IN PLANING AND PERFORMING AN AUDIT This standard required the auditor to consider consider the concept of materiality both in planing and planing and its performance stage during the planing phase auditor will consider will conduct the Risk Assessment Procedure to identify the risk to identify the risks of Material Mis statement and the and the identified ROMM Risk of material Mis Statement Risk of material Mis statement may be Higher Lower and medium and medium categories based on the ROMM of ROMM obtained auditor will set an amount what amount can be deemed as material using his professional Judgement and and adopting some bench mark , some standards based on based on which the materality Level will be fixed the concept of materiality has to be has to be applied for the FINANCIAL STATEMENT as a whole or some times, it may be requires for the for the particular class of transactions particular Account Balance or particular disclosure disclosure and what is the concept of Mis-statement? Mis- statement ? A mis- statement whose impact have impacts will "INFLUENCE" the Economic Decisions Economic Decisions by the users of Financial Statements Financial Statements that is called the material material Mis- statement , if it is material it will influence Influence the "ECONOMIC DECISIONS" that is the that is the BASE and what is the concept of what is the Definition of definition of "Performance materiality" Performance materiality is performance materiality is the amount or amounts some time auditor some time auditor may set lower than the materiality Level Materiality Level to conduct more detailed Checking to reduce the Risk Of Material Mis-Statement ROMM Then it is called performance materiality let us moves in to the standard aspect what what is the object of this standard the the object of this standard require the auditor require the auditor to consider the Concept of Materiality both in the planing and its performance stage performance stage planing stage already discussed and we will have more have more detailed discussions and what is the scope of this standard This standard scope of this standard this standard is an influence of another standard standard SA 450 SA 450 how the auditor evaluate the results of results of identified Mis- statement a Mis -statement a Mis-statement identified by the auditor during the course during the course of his audit and uncorrected Mis-Statement auditor has identified the Mis statement but it is not But it is not corrected, rectified by the management what are the impacts and the influence of influence of the Same ? and we will moves in to the concept of materiality Materiality in Audit which is different from different from.......The other particular other particular domains Financial statement Financial Statements will generally provide a reference to the concepts concepts of materiality if such reference in FRF FRF applicable FRF is missing Missing then the auditor has to adopt the following three basic Three basic concepts mis- statement which is includes which is including the omissions,are considered material material , if it is in Individual or Individual or aggregate influence influence the economic Decisions taken by the user taken by the user on the basis of Financial statement the Judgment as to the materiality has to has to be made by understanding the entity and its environment environment , nature and size factor and nature and the size factors and the judgment as to and the judgment as to a matter which is considered considered as material has to be made in the light of common common information needs of the users of users as a group thus auditors concept of materiality materiality application is based on purely based based on the professional judgement and the and the information needs of the users users in that aspect auditor will have will have Default assumption about users users have a reasonable understanding of the Business the business and economic activities and accounting process accounting process and users are willing to study the the information contained in the financial statement with financial statement by using a reasonable diligence diligence users must be aware that the financial the financial statement are prepared , presented and audited financial statement are prepared presented and audited by considering considering the concepts of materiality and user must user must understand that a reasonable level of reasonable level of uncertainty inherent to an amount which is based on the accounting judgement estimate and future transactions and and the user should use the information in a in a most wise manner wise manner to take their their and we will be moves in to the the auditors consideration of materiality materialtiy in the planing phase during the planing phase auditor will only consider the consider the size factor what size of mis statement can be can be considered material however in the in the execution state auditor will consider not only not only the size factor but also But also the nature of mis statement which is identified by the auditor and which is identified by the auditor but not corrected by the management these factor also be taken in to taken in to consideration and auditors consideration of consideration of the materiality we will moves will moves in to how, auditor shall frame the overall the over all audit strategies for the financialstatement financial statement as a whole for applying the concept applying the concepts of materiality, alternatively alternatively some particular class of transactions class of transactions, account balance or disclousre disclosure alone require certain detailed checking detailed checking why because it will influence influence the economic decisions taken by the users in that situations auditor has to apply the concept of the concepts of materiallity to that particular items particular items and auditor shall frame a strategy of strategy of performance materiality for the financial statement as a whole Financial statement as a whole or as the case may be the particular classes of transactions, Account balance or disclosure account balance or disclosure next our next our discussion will be on "BENCHMARKING" Bench marking is the base for determination of determining the amount what amount is considered as material and the performance materiality setting an setting an amount below than the amount we have arrived arrived through the bench marking bench marking is a yard stick or a standard standards based on that auditor will auditor will decide what is the amount which which is considered as material over that amount up to that amount and over that over that amount auditor will conduct a detailed auditing procedure below that he will do test checking test checking and sampling selection of benchmark is a professional judgment professional judgment by the auditor the percentage on a selected benchmark a selected benchmark the elected bench mark is the first step first step the first step in the determination of determination of materiality bench marking is a is a standard that standard may be through profit profit base , income based, profit before tax (PBT) PBT , Gross Profit (GP) Total Reveenue Total Revenue for the profit making entity and and non-profit making entity ( Not for profit) it will be it will be expense, total asset and and the "Net assets" this are this are the standards and bench marking factors factors are influenced by certain other other other element , First the component in Financial statement Financial Statement on that basis we can do assets assets, Liabilities income expense, net net worth the users of particular industry Industry will give significant importance on the particular matter, other industry users may Give , adopt PBT then that will be the yardstick The way entity is operated and Financed financed, Debt-Equity Ratio is one example and and benchmarking also susceptible to the to the volatility These are the main factors These are the main factors and classifications we already discussed already discussed it is based on expense based on income income depends on the profitabilty profitability Generally for profit making industry profit before tax (PBT) is the acceptable acceptable benchmark however in certain certain situations where PBT is volatile then we will adopt Gross Profit (GP) Or Total Revenue BUT the Percentage is applied on applied on the Profit before Tax (PBT) will be PBT will be substantially higher than than the Gross profit ( Gross profit) or Total Revenue For example for Example PBT we know it is a Lower Item In p&L But the Gross Gross Profit (GP) and the total revenue is the Higher items, so the item is higher we will apply the lower lower percentage below items, lower items Such as PBT we will apply the higher percentage this is the another ways revision of materiality during during the planing stage auditor may Fix an amount an amount which is considered as material but But during the progress of audit he may he may revise the materiality amount based on the further further audit evidence and what are the matters what are the matters to be documented? the matters to be documented are the materiality for the Financial Statement as a whole Financial statement as a whole or a particular class or classes of transactions Performance materiality that is setting a low amount low amount than the material amount Last But Not least any revision has happend revision has happens on the above discussions the materiality, performance materiality further revisions based on the audit evidence It is our Small discussion About the concepts of materiality THANK YOU FOR WATCHING THIS VIDEO FEED BACK TO [email protected]