SA 320 MATERIALITY IN PLANING & PERFORMING THE AUDIT
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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
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