1. Audit Materiality

2. Audits provide reasonable assurance that the financial statements are
Materiality
Audits provide reasonable assurance
that the financial statements are
free of material misstatements.

3. Materiality – Definition (Framework)
"Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must have if it is to be useful."

4. Materiality is defined in terms of financial statement users
USER FOCUS
Materiality is defined in terms
of financial statement users
Materiality can be on Qualitative/ Quantitative
factors
Therefore no hard and fast rules
Need to consider multiple users and multiple bases

5. SET PRELIMINARY JUDGMENT
ABOUT MATERIALITY
Factors Affecting Judgment
Base X (function of client)
Percentage (function of audit risk)
= Preliminary estimate of materiality

6. Materiality Percentage
Typically 1 - 5% for net income, lower
percentage for larger bases such as
assets or revenues
High Risk Low % ML
Low Risk High % ML
(less evidence; less assurance)

7. Materiality / Evidence
Relation
Increase in
Materiality
Level
Less
evidence
required

8. Materiality Level /Materiality and Audit Risk
There is a positive relationship between materiality level and audit risk
There is a negative relationship between materiality and audit risk
Materiality Level  = Audit Evidence ↓ = Audit Risk 
Materiality  = Audit Evidence  = Audit Risk ↓

9. Materiality Should be Considered by the Auditor When:
(a) Determining the nature, timing and extent of audit procedures;
and
(b) Evaluating the effect of misstatements.

10. Evaluating the Effect of Misstatements
In evaluating whether the financial statements "give a true and fair view" or "present fairly, in all material respects,", the auditor should assess whether the aggregate of uncorrected misstatements that have been identified during the audit is material

11. Evaluating the Effect of Misstatements
The aggregate of uncorrected misstatements comprises:
(a) Specific misstatements identified by the auditor; and
(b) The auditor's best estimate of other misstatements which cannot be specifically identified.

12. Evaluating the Effect of Misstatements
When aggregate uncorrected misstatements approach the materiality level the auditor would consider reducing the risk by
Performing additional audit procedures or
By requesting management to adjust the financial statements for identified misstatements

13. Evaluating the Effect of Misstatements
Example
An auditor discovered an overstatement of Rs. 20,000/- of inventory by verifying a sample of 100,000/- worth of inventory. The B/S value of inventory is Rs. 200,000/-. The preliminary materiality level set by the auditor is Rs. 30,000/-.
Required : Find if the misstatement is material or not.