ISA 320 (REVISED AND REDRAFTED) MATERIALITY IN PLANNING AND PERFORMING AN AUDIT
ISA 320 outlines the auditor’s responsibility in relation to the concept of materiality. It also interrelates with the provisions laid down in ISA 450 ‘Evaluation of Misstatements Identified During the Audit’ to which auditors must also refer as this provides guidance on how materiality is applied in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements.
Audit materiality is wholly judgemental and judgements concerning materiality are made in relation to the specific circumstances surrounding the entity. In addition, judgements are also made having regard to the size, complexity and objectives of the entity.
Materiality is set at the planning stage of the audit and auditors are aware that certain transactions or events may be material both in nature as well as in value. Consider the following simple case study:
On 1 January 2010 the managing director of ABC Inc transferred his entire holding in the entity’s issued share capital to the newly-formed holding company, XYZ Group Inc. The audit for the year end 31 December 2010 is being planned of the financial statements which show the following net assets:
Issued share capital $100 (made up of 100 $1 shares)
Retained earnings $590,000
We can see from the above that the issued share capital is made up of 100 $1 shares which were previously owned by the managing director and which have been transferred ...