What is Audit Materiality?
When an audit firm in Johor Bahru is performing an audit (Also see Principles of Auditing), audit materiality is crucial. It is bacause the misstatements the company has committed will be perceived as material if it has a high possibility of reasonably influencing the financial decision of the users of the company’s financial statements. When considering materiality, the company should consider both qualitative and quantitative aspects. In general, the company will find it more challenging to measure for the qualitative aspects compared to the quantitative aspects.
There are three types of audit materiality, which are overall materiality, overall performance materiality and specific materiality.
This refers to the materiality level that shows a significant level in the company’s financial statements. According to the auditor that the company has appointed, it may influence the decision making of the users of those statements as a whole.
Overall Performance Materiality
Based on the judgement of the company’s auditor, overall performance materiality indicates that the materiality amount is lower than that of overall materiality. This level of materiality involves the risks (Also see Introduction to Audit Risks) or a few types of minor mistakes or small omissions that the auditor cannot find. However, those mistakes and omissions can be material if they are aggregated. However, the probability that the aggregated small misstatements would exceed the overall materiality level is low.
This is the materiality level the auditors set to determine the possible misstatements which may occur and have an impact on the decision making of the users of the company’s financial statements. Such misstatements may happen in different parts of the company, in a particular category of transactions, or in the account balances.
The Importance of Audit Materiality
– Audit materiality has taken both quantitative aspects as well as the qualitative aspects into consideration. This is because not only the quantitative part will affect the economic decisions of the users of the company’s financial statements. Instead, the qualitative aspects will also influence the decision making of the users of the financial statements significantly. Such aspects include adequate disclosures regarding the related party transactions, contingent liabilities, as well as the changes in the accounting policies of the company.
– Besides, audit materiality forms the base of the auditor’s opinion about the company. This is because the auditor needs to acquire a reasonable level of assurance (Also see The Differences Between Audit and Assurance) regarding whether there is any material misstatement in the company’s financial statements.
Limitations of Audit Materiality
– The auditor may not be able to set the level of materiality appropriately, and this may impede the aim of fixing a materiality level.
– The auditor may be unable to detect the misstatement, which has an impact on the company’s compliance (Also see Types of Audit – Compliance Audit) with the regulatory requirements.
– Generally, it is more difficult to measure the qualitative aspects than the quantitative aspects.