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v=ST_wVEYki20&noredirect=1 SCRIPT Materiality is another very important concept in the context of the audit because it identifies the amount or type of errors that may influence a user to change their decision using the financial information presented. There are three important concepts embodied in materiality. First, a material misstatement is considered in the context of a knowledgeable users and its effect on the decision making. Second, that materiality is relative to the circumstances. And thirdly, that the users are considered as a group, and not individually. When the auditor identify a material misstatement, the path forward is either: To request of the client to make a correction for the misstatement, or alternatively issue a modified opinion. Lets walk through how materiality is set and used throughout the audit.
In the fifth step, it is the maximum possible misstatement which gets compared against materiality we set at the planning stage, and if the misstatements are greater than materiality, then there is one of three possible outcomes: 1. The client will have to make an adjustment to lower the unrecorded misstatements. 2. The auditor will have to perform more work to reduce the size of the maximum possible misstatement. 3. The audit opinion may be modified. For many audits, the third, fourth, and fifth steps are combined into one seamless evaluation. Materiality and risk in auditing are closely related and inseparable. Think of materiality as a measure of magnitude of misstatement, and think of risk as a measure of uncertainty. So if you want to conceptually wrap your mind around what an audit opinion is really saying, you could interpret the audit opinion to read that there is a 5% risk that we, as the auditor, failed to uncover a misstatement of $1 million or more. However, as closely as risk and materiality appear to be related, note that materiality is not part of the Audit Risk Model. Yet, materiality is added incrementally to the audit program to determine the planned extent of evidence required. Both lower materiality thresholds and lower detection risk, will increase the audit procedures and the sample sizes. A very common misconception for new practitioners to mistakenly suggest that because we simply have high audit risk, we must choose a lower materiality. While high audit risk and low materiality are common outcomes, the two are based in different considerations. Audit risk is based on an assessment of inherent risk and control risk. Whereas materiality is based on the anticipated judgements of users. So hopefully that makes sense, and until next time, dont stop until you get to the top and when you get to the top dont stop.