Role of Materiality in Auditing in Advanced Auditing Essay

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Auditing

We are living in times of continuous change that thrives on information. Information is the cornerstone of the financial construct of organizations. Information and access thereto drives the success of organizations in present times. The way the external world receives the statements of organizations is causal to its perception by individuals and institutions in evaluating it. As such, it is imperative that the architects and designers of this vital information need to pursue diligently highest levels of moral, ethical, and professional standards in preparing it. In providing for the financial and economical framework for such information, services of auditors are simply indispensable. The audited reports of an organization is the basis on which the organization makes its statement of intent public and helps aid the process of decision making and perception about it in the capital and investment markets (Franca & Maria, n.d.).

IMPORTANCE OF MATERIALITY IN AUDITING

"Audire" in Latin means "to listen" and it is here that the origin of the modern English word 'audit' is traced to. In an earlier connotation in English, 'to audit' meant 'to verify'. In a definition in Webster's, auditing implies, verification of financial books and accounts by designated authorities. The British encyclopedia offers to give a much broader sense to audit. According to it, audit is the analysis of 'certain circumstances within a certain domain"(Franca & Maria, n.d.).

An audit is the cause and effect that can be applied in any field of activity. It is an important tool to achieve certain objective. It can be used for creation of benchmarks from which to seek corrective actions. Each country frames its own set of rules for audit that are in consonance with the objectives of its own constitution and legal framework. The grounds for financial audit are set up so as to round off the financial cycles of an entity and serve as a measure of its performance in accordance with the regulations and directives in force. In practice, such assessment of performance is idealistic in nature and hence in trying to attain the same, a reasonable level of completion and accuracy is assured (Franca & Maria, n.d.).

The auditors are obliged to define materiality based on financial accounts to know the influence that would affect the decision making of the people, investors, and capital markets. Such an amount of misrepresentation or calculated misinformation that would substantially affect judgments about the entity is to be appropriated properly by the auditing authorities (Franca & Maria, n.d.).

With regards to an organization, a certain amount is first decided as significant outcome to expressly account for as materiality. According to The International Audit Standard 320, the function of a financial statement is to avail the auditor sufficient grounds to make a decisive opinion about the entity in question in all respects that arise from any financial statement.

Materiality depends on the total impact that an event may have or the effect of a known misrepresentation or calculated omission. The onus is on the auditor to appropriate the cumulative value of an error that may seem insignificant and qualify to be ignored individually. In such cases the auditor has to ascertain the nature, the substantiality and timing of the materiality of such occurrences to obtain the full impact of erroneous (Franca & Maria, n.d.).

Materiality is a defining point quantitatively adhered to by an entity rather than being simply a qualitative appropriation to be really useful. Materiality is then a measure of the significance of erroneous information that may influence the decision of those pursuing it for arriving at a result. (FASB)

Materiality is the total accumulation of all errors, misrepresentations and omissions that when seen individually or cumulatively, may render a sufficiently comprehensive financial and operational picture of the entity. Materiality then falls within the tolerable levels of errors in the accounts and financial results and statements on one hand and the level of camouflage that it may assign or offer to the statement on the other hand (Franca & Maria, n.d.).

FACTORS DEFINING MATERIALITY IN AUDITING

The relativity of materiality.

Materiality is of relative significance. While for one particular case a certain value may be significant materiality, in some other case, it may be insignificant. The ratio of the part to the whole then becomes the real measure of significance in the finance and account statements. The significance of materiality, hence, decides the significance that is to be attested to the errors within the financial statement.(Franca & Maria, n.d.).

The most frequently used parameter is the size of profit that best denotes the success (ranging from 1 to10% of the profit).

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In that case, the deciding factor will be net or gross profit, or dividends. If the profits are not very significant, then the parameters for materiality may be chosen from assets or turnover of the company.

Materiality can also be measured from a qualitative factor such as frauds committed by an entity. In that event, the scale is a measure, but such scale may be considered insignificant materiality cost if observed as an error, instead (Franca & Maria, n.d.).

Determining Materiality and Performance Materiality When Planning the Audit

As referred to in public domains, that is, in the transactions of the persons and departmental audit of the government-owned domains, the depth, scope and balancing of accountability or materiality is lax in nature when compared to that in private entities. The nature of work, individuals involved and the objects of the works being audited could be causative for this relaxation of norms. Audits of public enterprises and departmental work may also require certain specific stipulations that are binding on the auditors. The purpose of audit in public domains is governed by both qualitative as well as quantitative considerations (referred to in the ISAs as aspects related to the "quantum" and "characteristic" of misstatements). Paragraphs 10 and 11 in the ISA define the scope of materiality. The mandated and accorded salaries and perquisites to the functionaries in the bureaucracy and members of cabinets and ministers fall under classified information and may be accessed and scrutinized only after seeking certain permissions. The examination of transgression of sensitive travel and hospitality expenses borne by the government can only be a comparative statement of all similar transactions (INTOSAI, n.d.).

The auditors of the public accounts need the support of establishing a connection between the material accountability of the financial accounts and statements with the objectives of the regulations and controls within the confines of the legal framework. The auditor, may, for example, point out the discrepancy in the financial statements by pointing out the overall effect on the whole construct by displaying the one wrought by only a part of the whole. To achieve this he may make use of set standards of controls and thereby exemplify the deviations caused. The appropriation of quantitative materiality in public domains is attended to, by ISA in Paragraph A2. The determination of materiality of a financial statement or part thereof, whether it be a disclosure, assertion or balancing of accounts in transactional values, is ascertained by way of qualitative measure and analysis, by the auditors in the public domain. (INTOSAI, n.d.).

ISA, in its Paragraph 9A, attends to the relevant benchmarks for materiality in the financial accounts. All Public sectors that are required to recover costs and expenditures, the gross statements, meaning, accruals, and revenues are set as benchmarks. The net costs are not deemed the proper measure of materiality in such cases. Those public enterprises wherein trust is reposed for large accounts and capitals, the net liabilities or assets could be applied benchmarks of materiality. In certain other cases of public domains, other types of relevant benchmarks could ascertain qualitative materiality. (INTOSAI, n.d.).

Materiality, when recast, with a variance in connotation should still carry the same integrity and transparency. It should be able to bear the scrutiny of agencies external to the construct it is meant for and should be under the direct control of the Board. Although essential, different implications of materiality will cease to be effective and sufficient to the cause assigned if the practical implementation is not meaningfully delivered by it. The five tests of materiality provide robustness to it, if they are applied appropriately to the context. That is specifically so because company structures vary greatly. And even within a company itself, place, situation and timing may change necessitating a change in the interpretation of and the implementation of the definitions. Hence, the issue of generality of defining materiality is overshadowed by its specific relevance for the performance of a company at a particular point of time and situation in a particular place (Zadek & Merme, 2003).

Conclusion

The incorporated values of materiality within the working culture of a company is important not only for the audit and account officers, but also equally so for the academicians, control and regulating authorities and professionals. A revisit by historian auditors based on the guidelines of the AICPA of the restatements made, the parameters of evaluation….....

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