AUDIT STANDARD NO 7 – MATERIALITY AND AUDIT RISK
Audit Standard No 7 defines materiality and audit risk in performing the
audit task.
1. Definition of materiality
Materiality consists in determining those important and significant issues (activities,
programmes, functions, indicators or transactions), the ignorance, incorrect or wrong
interpretation of which could influence the user of the information contained in a
financial statement or audit report and could result in wrong decisions.
2. Aspects of materiality
Materiality is considered in the following three aspects:
2.1 Materiality by value – an issue is defined as significant and important on the
grounds of its absolute value or relative share of the auditee’s budget, activities,
programmes or functions;
2.2 Materiality by nature (character) – an issue is defined as significant and
important based on the assumption that particular elements of the information for
the auditee are of particular importance for the users; when there is a strong public
interest due to the nature and importance of the information; or if any law explicitly
requires the publication of the information;
2.3 Materiality by context – an issue, that might not be material by value or
nature is judged significant and important due to the circumstances in which it
appears; the implication it could have for future activities and their possible
consequences, as well as when it is related to other issues, significant and
important for the user of the information.
3. Materiality threshold
Materiality threshold is the maximum acceptable level of errors and irregularities that
would not affect substantially the decisions and behaviour of the users of the
information contained in a financial statement or audit report.
4. The specific materiality threshold for each audit task is determined on the
basis of the characteristics of the auditee and the National Audit Office audit policy.
5. Audit risk
Audit risk is the risk of expressing a wrong audit opinion or wrong assessment while
performing the audit task as a result of substantial errors and irregularities in the
information being used or because of other reasons.
6. Components of the audit risk
Audit risk comprises the following components:
6.1 Inherent risk is the risk of errors and irregularities resulting from the
auditee's activity and the environment in which it operates: the structure and
organisation of the auditee; the quality of management; the complexity and
variety of its activities; the frequency of changes of management; the
professional skills and qualification of the staff; and other factors related to
the operations of the auditee;
6.2 Control risk is the risk that the internal control procedures of the auditee will
not detect, prevent and correct on a timely basis material errors and
irregularities, that might occur because the control procedures have not been
applied effectively and constantly throughout the audited period or because
there are no such procedures;
6.3 Detection risk is the risk of non detection of errors and irregularities by the
audit procedures chosen by the auditor that individually or together with other
errors/irregularities may be material and have not been detected and
corrected by the auditee’s control procedures.
7. The specific levels of the individual components of audit risk in different audits
are determined on the basis of the specific features of the auditee and National Audit
Office audit policies.
8. The National Audit Office determines a maximum level of audit risk and
maximum materiality threshold for all audits conducted in accordance with its audit
policies.