Diana Hillier November 2009 Materiality: Planning & performing the audit Evaluating misstatements ISAs (UK and Ireland) 320 and 450

ISA 320 – why revise? Several national standard setters had progressed their national standards Importance of the consideration of not only size, but nature and circumstances too Deal with earnings management and bias Guidance possible to lead to greater consistency in judgments?

Two new ISAs Following the initial exposure, IAASB concluded that clarity would be enhanced by dealing separately with: ISA 320 The determination of materiality and how it is used in planning and performing the audit ISA 450 The evaluation of misstatements identified during the audit

ISA 320 – Key points Definition of materiality replaced by description of common characteristics More requirements related to determination of materiality and related amounts But the ISA recognises the importance of judgment and doesn’t specify a specific methodology

ISA Levels Materiality for the financial statements as a whole Particular classes of transactions, account balances or disclosures, if any Performance materiality(s) for above, if any Performance materiality to be used for assessing risks and planning procedures

ISA 320 – Determining levels Users’ information needs drive overall materiality level Often % of a benchmark (e.g., 5% of profit before tax from continuing operations) Specific materiality levels used if lower level for certain items would influence users’ judgments (e.g., directors’ remuneration)

ISA 320 – Determining levels cont’d Performance materiality less than overall materiality to allow for: –Aggregation of individually immaterial amounts –Possible undetected misstatements Expectations of nature and extent of errors relevant in determining level All of these levels may need to be adjusted as audit progresses

ISA 450 – Key points Number of new requirements Misstatements = differences from what is expected by GAAP or from what is needed for true and fair view, and include: –Factual misstatements –Judgmental misstatements –Projected misstatements

ISA 450 – Judgments involved If nature of misstatements indicate others may exist, or aggregate approaches materiality Overall audit strategy and audit plan Accumulate misstatements other than clearly trivial as audit progresses

Communicate all misstatements to management on a timely basis* Request management to correct them Obtain reasons for any not corrected. Take into account when evaluating whether f/s are free of material misstatement Communications to management * unless prohibited by law or regulation (e.g., “tipping off”)

Determine if uncorrected misstatements are material Evaluate impact both individually and in aggregate Consider: Size and nature Circumstances of occurrence Effect of uncorrected misstatements of prior periods Evaluating Uncorrected Misstatements Before evaluation, reassess materiality levels for financial statements as a whole and specific amounts

Communicate to those charged with governance Communications to those charged with governance Uncorrected misstatements* Their effect, individually and in aggregate, on the audit opinion Request that uncorrected misstatements be corrected Effect of uncorrected misstatements of prior periods *unless prohibited by law or regulation (e.g., “tipping off”)

Representations & Documentation Request written representation whether directors believe the effects of uncorrected misstatements are immaterial + Include or attach summary of uncorrected misstatements Document  “Clearly trivial” threshold  All misstatements identified and corrections made  Conclusion re: whether uncorrected misstatements are material