2020/21 Reporting Season: determining audit materiality

16 December 2020: The latest guide from ICAEW’s Audit and Assurance Faculty reminds auditors what to consider when determining audit materiality and how, given the impact of the pandemic, these considerations might be relevant to audits in the 2020/21 reporting season.

 The pandemic has changed the nature and circumstances of many businesses. Whether these changes are temporary or more permanent, auditors will need to be thinking about the effect these changes have on their determination of materiality. There may be difficult judgments about materiality to make and these need to be documented in audit files. 

Overall materiality is determined at the planning stage of the audit, typically by applying a percentage to a chosen benchmark. For some audits, overall materiality will likely be set at a lower level than in previous periods, which could increase the scope and extent of testing needed. 

There may be some exceptions where businesses have not been adversely affected by COVID-19 and are not expected to be in the future. For businesses that have experienced more fundamental and long-lasting adverse changes, auditors are likely to be thinking about whether a more permanent change in the benchmark for determining overall materiality is appropriate. 

Auditors will want to consider whether there has been a change in users of the accounts or their focus, given that judgments about materiality are affected by their perceptions of the financial information needs of users of the accounts, as well as the size or nature (or both) of misstatements.

Adjustments to materiality may be needed if it has been determined before the year end based on forecast information and the actual figures are significantly different or because material audit adjustments have subsequently been identified. If auditors need to revise materiality downwards at a later stage in the audit, this is likely to result in additional audit work being performed. Auditors may, therefore, need to spend more time on determining materiality than they might ordinarily.

The guide, COVID-19: Determining Materiality highlights specific considerations for:

• Determining overall materiality, including the appropriateness of the benchmark used. 
• Performance materiality, including whether there is an increased risk of override of controls, fraud or error or changes to the control environment.
• Lower specific materiality, including whether individual line items have become more material.
• Evaluating misstatements, including considering the nature of misstatements and the impact of unadjusted misstatements in opening balances.
• Reassessing materiality, and the implications this has for the audit work required.
• Documenting the rationale, including whether the audit file clearly explains the thought processes and factors considered.

The guide also covers implications for group audits, communications with those charged with governance and audit reports.