Concept of Audit Materiality
dAny information is
material if its mis-statement could influence the economic decisions of
the any user who uses the information audited by the principal auditor as the
basis of his decision. Material statements is always relative and depends upon
the size and nature of the item, judged in particular situations and
circumstances of its mis-statement. The assessment of what is material
is a matter of professional judgment of the principal auditor which needs to be
taken in the course of auditing the financial information of the entity.
The principal auditor considers material statements at both the overall financial
information level and in relation to individual account balances and
class of transactions. material statements may also be influenced by the legal
and statutory framework and requirements.
The principal auditor must take into account the possibility of mis-statement of relatively
small amounts that, cumulatively, could have material effect on the
financial information.
There is an inverse relation between material statements and the degree
of audit
risk, that is, higher the material statements level, lower the audit
risk and
vice versa. For example the risk that a particular account balance or
class f transaction could be misstated by an extremely small amount
might be very high. The principal auditor takes this inverse
relationship between material statements and audit risk into account
when determining the nature,
timing and extent of his auditing procedures.
In forming his opinion on financial information, the principal auditor
should
consider whether the effects of aggregate uncorrected mis-statements on
the financial information are material. The aggregate of uncorrected
mis-statement comprises specific mis-statements identified by the
principal auditor
and the principal auditor’s best estimates which cannot be
specifically
indentified. Qualitative considerations also influence an principal
auditor in
reaching a conclusion at to whether the mis-statements are material. If
the analytical auditing procedures indicate that mis-statements might
be present, but not its or approximate near about amount, the
principal auditor generally would
have to use other auditing procedures to enable him to estimate the
aggregate mis-statement.