Reporting − Part I
(Old) (Old)
ISA 320 ISA 700
(Revised)
(New) (Amended)
ISA 320
ISA 450 ISA 700
2
Overview of ISA 320
• Introduction
• Significant Features of New Standard
– New Approach to Understanding Materiality
– Materiality Levels
• Materiality for Financial Statements as a Whole
• Materiality for Particular Classes of Transactions, Account
Balances or Disclosures
• Performance Materiality
– Revision of Materiality
– Documentation 3
Introduction
• The context for revising ISA 320
– Developments in national standards and guidance
– Need for greater consideration of nature of an item
and the entity’s circumstances when determining
materiality and evaluating misstatements
– Importance of considering possibility of aggressive
earnings management and management bias when
evaluating whether the financial statements are free
of material misstatement
4
New Approach to Understanding Materiality
• Definition of materiality replaced by description of
common characteristics often discussed in financial
reporting frameworks (FRFs)
– If FRF provides a definition or discussion of materiality,
use this as a frame of reference in determining materiality
for the audit
– If not, use characteristics in the ISA as a frame of reference
• Apply materiality in
– Planning the audit
– Determining nature, timing and extent of further procedures
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Materiality Levels
Particular classes of
transactions, account
balances or
disclosures, if any
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Materiality for Financial Statements as a Whole
• Users’ information needs drive overall materiality level
– No specific methodologies prescribed − use of
professional judgment is key
• Often a percentage of a chosen benchmark may be an
appropriate starting point
– Standard provides guidance on choosing an appropriate
benchmark
– No specific guidance on percentages provided
• Consider whether adjustments to benchmark needed for
significant changes in entity’s circumstances
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Materiality for Particular Classes of
Transactions, Account Balances, or Disclosures
• Lower materiality levels used if specific items
would influence users’ economic decisions taken
on the basis of the financial statements
– However, this does not mean a materiality level needs
to be determined for every line item or disclosure
• Consider whether there are any relevant factors
that may indicate whether there are particular
items that would influence users’ judgments
8
Performance Materiality
• Performance materiality (PM) less than materiality
for financial statements as a whole
• Serves two purposes:
– To allow for aggregation of immaterial amounts
– To provide margin for possible undetected misstatements
• Used to:
– Assess risks of material misstatement
– Determine nature, timing and extent of further audit
procedures
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Performance Materiality
• Possible approaches:
– One PM level based on materiality for financial
statements as a whole, or
– More than one PM level in relation to different items
• If materiality level(s) have been set for particular
items, PM also refers to amount(s) set at less than
these levels
• Determination of PM not a mechanical exercise
– Use of professional judgment is key
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Revision of Materiality
• Materiality levels not cast in stone once
determined
• Adjust as necessary as the audit progresses for
– Changes in entity’s circumstances
– New information
– Change in understanding of entity and its operations
• If materiality levels adjusted, consider whether
nature, timing, and extent of further audit
procedures also need adjustment
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Documentation
• Document
– Materiality for financial statements as a whole
– Materiality level(s) for particular items
– Performance materiality for above
– Revisions to the above as the audit progresses
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Note
13
International Federation
of Accountants