How may auditors improve their professional judgements and communications on materiality? Katharine Bagshaw explores recent insights.
The materiality requirements in the International Standards on Auditing (ISAs) can be difficult. Inspection findings, reviews and experience in practice have all been known to highlight it as an area where there is room for improvement. So, the various consultations and reports on this somewhat technical subject during 2017 may all merit consideration. First, we had ICAEW’s practical guidance on the application of materiality. This was followed by IFRS issuing a practice statement on making materiality judgements when preparing financial statements and an Exposure Draft proposing clarifications to the definition of what information is material in preparing financial statements.
Finally, as the year drew to a close, we had two documents from the Financial Reporting Council (FRC): a staff guidance note on auditor’s consideration of materiality relating to other information and an Audit Quality Thematic Review (AQTR) on materiality.
The rest of this article focuses on the December 2017 AQTR (Review), and what has changed since 2013 – when the FRC last published an AQTR on materiality. When the 2017 review was published, some in the professional press suggested that there was still work to be done. For example, an economia headline read: Top firms must explain materiality judgements better. But the headlines belie the overall tone of the review, which notes at the outset that the FRC is “pleased that the majority of the key messages for audit firms in our last report have been addressed by the firms”. These include:
- an increased emphasis on judgement, rather than allowing teams to default automatically to the highest levels of materiality permissible under the firms’ methodology;
- the provision of guidance by some firms to encourage teams to reduce performance materiality to reflect the increased risk in first year audits; and
- enhanced firm guidance on industry-specific materiality levels
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