Which audits are affected?
ISA (UK) 701 (Revised November 2019) (Updated January 2020) applies to audits of listed entities, non-listed public interest entities, entities that are required, and those that choose voluntarily to report on how they have applied the UK Corporate Governance Code, where the auditor is required by law or regulation to communicate key audit matters in the auditor’s report, as well as where the auditor voluntarily chooses to do so.
Audit report implications
Previously, auditors were required to provide an explanation of how they had applied the concept of materiality in planning and performing an audit and they had to specify the overall materiality threshold used (ie materiality for the financial statements as a whole). These disclosures may have included the threshold for performance materiality though this was not a requirement.
Under revised ISA 701, auditors must now include the threshold set for overall materiality and performance materiality in the auditor’s report, as well as an explanation of the significant judgements made by the auditor in determining both overall materiality and performance materiality. This might include, for example, the rationale for the determination of performance materiality, as well as the rationale for a change in basis or any significant revisions to both overall and performance materiality through the course of the audit. Given the profound impact COVID-19 has recently had on businesses, this may be particularly relevant in the current environment.
When do the revisions take effect?
These changes are effective for audits of financial statements for periods beginning on or after 15 December 2019.
Where can I find more guidance on materiality?
Our practical guide on materiality in the audit of financial statements covers the key requirements, practical challenges and provides practical illustrations for auditors.
The Audit and Assurance Faculty’s guide, COVID-19: Determining materiality provides practical considerations for auditors in the current environment.