Which of the following is a correct statement regarding performance materiality
The completion stage of the audit is when the auditor reviews the work performed and considers the implications for the auditor’s report. A crucial part of this review is the evaluation of misstatements found during the audit. This article describes and discusses the requirements of ISA 450, Evaluation of Misstatements Identified during the Audit and provides some examples of the application of the ISA in the context of the Advanced Audit and Assurance exam. Show
ISA 450 – Objectives and definitionsAccording to ISA 450, the objectives of the auditor are to evaluate:
Specific requirements and application of ISA 450ISA 450 requires that ‘the auditor shall accumulate misstatements identified during the audit, other than those that are clearly trivial’. The auditor should set a monetary benchmark below which misstatements are considered to be clearly trivial and would not need to be accumulated because the auditor expects that the accumulation of such amounts clearly would not have a material effect on the financial statements. The application notes to ISA 450 make it clear that ‘clearly trivial’ is not another expression for ‘not material.’ The auditor will need to use judgement to decide whether matters are clearly trivial, and this may be affected by a range of issues including but not limited to the monetary size of the matter, for example, the level of audit risk being applied in the situation. ISA 450 also requires that ‘The auditor shall communicate on a timely basis all misstatements accumulated during the audit with the appropriate level of management, unless prohibited by law or regulation. The auditor shall request management to correct those misstatements.’ Simply put, this means that the auditor keeps a note of all misstatements (other than those which are clearly trivial), raises them with management and asks for the misstatements to be corrected in the financial statements. It is useful, when evaluating misstatements and in making requests to management for misstatements to be corrected, to consider and apply the framework as laid out in ISA 450, which categorises misstatements as follows:
With projected misstatements, because these are based on extrapolations of audit evidence, it is normally not appropriate for management to be asked to correct the misstatement. Instead, a projected misstatement should be evaluated to consider whether further audit testing is appropriate. Correction of MisstatementsManagement is expected to correct the misstatements which are brought to their attention by the auditor. If management refuses to correct some or all of the misstatements, ISA 450 requires the auditor to obtain an understanding of management’s reasons for not making the corrections, and to take that understanding into account when evaluating whether the financial statements as a whole are free from material misstatement. Evaluating the Effect of Uncorrected MisstatementsThe auditor is required to determine whether uncorrected misstatements are material, individually or in aggregate. At this point the auditor should also reassess materiality to confirm whether it remains appropriate in the context of the entity’s actual financial results. This is to ensure that the materiality is based on up to date financial information, bearing in mind that when materiality is initially determined at the planning stage of the audit, it is based on projected or draft financial statements. By the time the auditor is evaluating uncorrected misstatements at the completion stage of the audit, there may have been many changes made to the financial statements, so ensuring the materiality level remains appropriate is very important. Some misstatements may be evaluated as material, individually or when considered together with other misstatements accumulated during the audit, even if they are lower than materiality for the financial statements as a whole. Examples include, but are not restricted to the following:
Communication with those charged with governanceISA 450 requires the auditor to communicate uncorrected misstatements to those charged with governance and the effect that they, individually or in aggregate, will have on the opinion in the auditor’s report. The auditor’s communication shall identify material uncorrected misstatements individually and the communication should request that uncorrected misstatements be corrected. The auditor may discuss with those charged with governance the reasons for, and the implications of, a failure to correct misstatements, and possible implications in relation to future financial statements. Perhaps the key issue here is that that auditor should discuss the potential implications for the auditor’s report, which is likely to contain a modified opinion, if material misstatements are not corrected as requested by the auditor. In addition the auditor is required to request a written representation from management and, where appropriate, those charged with governance with regard to whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole. DocumentationFinally, ISA 450 requires certain documentation in relation to misstatements:
ConclusionCandidates preparing for the Advanced Audit and Assurance exam should ensure that they are familiar with the requirements of ISA 450 as ultimately in forming an opinion on the financial statements the auditor must conclude on whether reasonable assurance has been obtained that the financial statements as a whole are free from material misstatements and this conclusion takes into account the auditor’s evaluation of uncorrected misstatements. Written by a member of the P7 examining team Which of the following is correct concerning performance materiality?Answer (a) is correct because performance materiality is largely established to help provide assurance that several immaterial misstatements do not combine to a material undetected amount of misstatement; accordingly, it ordinarily is established at a level lower than that of materiality for the financial statements.
Which of the following is a correct statement regarding performance materiality quizlet?Which of the following is a correct statement regarding performance materiality? Determining performance materiality is necessary because auditors accumulate evidence by segments.
What is performance materiality?Performance materiality is an amount less than materiality for the financial statements as a whole (i.e., planning materiality) to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
What does performance materiality refer to quizlet?Performance materiality refers to the overall materiality amount allocated to account balances or classes of transactions. True. As a starting point for determining performance materiality, the auditor usually uses which approach: -Calculates 50-75% of overall planning materiality.
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