ISA 320 - Materiality in Planning and Performing an Audit

Question 1

ISA 320: Materiality in Planning and Performing an Audit:

Answer 1

> Some item in Financial Statements may not be important to the users.
Misstatements are Material if they could influence the decisions of users of the Financial Statements.

Question 2

ISA 320: Materiality:

Answer 2

3 Stages of the Audit:
* Planning:
* Progress:
* Reporting:

Concept of Materiality:
* Present in applicable Financial Reporting Framework = Yes, then Adopt it.

• If not Present, then apply Auditor’s Professional Judgement.
  Factors that affect Materiality:
  1) Misstatement - Individually or aggregated, has the power to change the economic decisions of the users.
  2) Surrounding circumstances, and are affected by the size or nature of a Misstatement or both.
  3) Matters that are material to users of the Financial Statements are based on a consideration of the common Financial information needs of the entity.

Materiality:
Planning Stage = $100 000.

> Therefore something like $50 will be immaterial. However these amounts must be noted down because at times Individually they can be immaterial but they will be many such that when aggregated collectively, they will come Material.

Auditor may set Performance Materiality Levels for particular classes of transactions, Account Balances or Disclosures.

Question 3

ISA 320 Factors affecting Materiality:

Answer 3

> The Elements of the Financial Statements

> Items on which user attention is focused.

> Entity and its Life Cycle, Industry, etc.

> The Entity’s ownership structure.

Benchmark:
> Assets / Liabilities/ Equity/ Revenue/ Expenses: Elements of FS.
> Profit/ Revenue/ Net Assets: User Attention.
> Manufacturing - Assets Peak Stage - Profits: Lifecycle and Industry.
> Debt Finance - Assets
Equity Finance - Profits: Ownership Structure.

Question 4

ISA 320: Revision in Materiality Level as the Audit Progresses.

Answer 4

Probability of error - It must be brought to acceptably Low Levels though zero is impossible.

Question 5

ISA 320: Planning and Materiality:

Answer 5

Change in Materiality will change the Nature, Timing and Extent of Audit Plan.

Question 6

ISA 320: Audit Risk and Audit Materiality:

Answer 6

Inversely related. ie,
> The lower the Audit Risk, Materiality Level must be higher
> The higher the Audit Risk, Materiality Level must be lower.

Question 7

ISA 320: Documentation:

Answer 7

> Materiality for the Financial Statements as a whole.
Materiality Levels for particular classes of transactions, Account Balances or Disclosures.
Performance Materiality
Any revision as the Audit progressed.

Question 8

ISA 330: