Materiality, Misstatements and
Reporting − Part I
ISA Implementation Support Module
Prepared by IAASB Staff
October 2010
Overview of Module
(Old)
ISA 320
(Revised)
ISA 320
(Old)
ISA 700
(New)
ISA 450
(Amended)
ISA 700
2
Overview of ISA 320
• Introduction
• Significant Features of New Standard
– New Approach to Understanding Materiality
– Materiality Levels
• Materiality for Financial Statements as a Whole
• Materiality for Particular Classes of Transactions, Account
Balances or Disclosures
• Performance Materiality
– Revision of Materiality
– Documentation
3
Introduction
• The context for revising ISA 320
– Developments in national standards and guidance
– Need for greater consideration of nature of an item
and the entity’s circumstances when determining
materiality and evaluating misstatements
– Importance of considering possibility of aggressive
earnings management and management bias when
evaluating whether the financial statements are free
of material misstatement
4
New Approach to Understanding Materiality
• Definition of materiality replaced by description of
common characteristics often discussed in financial
reporting frameworks (FRFs)
– If FRF provides a definition or discussion of materiality,
use this as a frame of reference in determining materiality
for the audit
– If not, use characteristics in the ISA as a frame of reference
• Apply materiality in
– Planning the audit
– Determining nature, timing and extent of further
procedures
5
Materiality Levels
Materiality for the financial statements as a whole
Particular classes of
transactions, account
balances or
disclosures, if any
Performance
materiality(s) for
above, if any
Performance materiality for
assessing risks and planning
further audit procedures
6
Materiality for Financial Statements as a Whole
• Users’ information needs drive overall materiality level
– No specific methodologies prescribed − use of
professional judgment is key
• Often a percentage of a chosen benchmark may be an
appropriate starting point
– Standard provides guidance on choosing an appropriate
benchmark
– No specific guidance on percentages provided
• Consider whether adjustments to benchmark needed for
significant changes in entity’s circumstances
7
Materiality for Particular Classes of
Transactions, Account Balances, or Disclosures
• Lower materiality levels used if specific items
would influence users’ economic decisions taken
on the basis of the financial statements
– However, this does not mean a materiality level needs
to be determined for every line item or disclosure
• Consider whether there are any relevant factors
that may indicate whether there are particular
items that would influence users’ judgments
8
Performance Materiality
• Performance materiality (PM) less than materiality
for financial statements as a whole
• Serves two purposes:
– To allow for aggregation of immaterial amounts
– To provide margin for possible undetected misstatements
• Used to:
– Assess risks of material misstatement
– Determine nature, timing and extent of further audit
procedures
9
Performance Materiality
• Possible approaches:
– One PM level based on materiality for financial
statements as a whole, or
– More than one PM level in relation to different items
• If materiality level(s) have been set for particular
items, PM also refers to amount(s) set at less than
these levels
• Determination of PM not a mechanical exercise
– Use of professional judgment is key
10
Revision of Materiality
• Materiality levels not cast in stone once
determined
• Adjust as necessary as the audit progresses for
– Changes in entity’s circumstances
– New information
– Change in understanding of entity and its operations
• If materiality levels adjusted, consider whether
nature, timing, and extent of further audit
procedures also need adjustment
11
Documentation
• Document
– Materiality for financial statements as a whole
– Materiality level(s) for particular items
– Performance materiality for above
– Revisions to the above as the audit progresses
12
Note
This set of support slides does not amend or override
the ISAs, the texts of which alone are authoritative.
Reading the slides is not a substitute for reading the
ISAs. The slides are not meant to be exhaustive and
reference to the ISAs themselves should always be
made. In conducting an audit in accordance with
ISAs, the auditor is required to comply with all the
ISAs that are relevant to the engagement.
13
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of Accountants
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