Joanne M. Flood - Wiley Practitioner's Guide to GAAS 2020

1 1 Refer to the October 2018 AICPA Peer Reviewer Alert at https://www.aicpa.org/content/dam/aicpa/interestareas/peerreview/newsandpublications/downloadabledocuments/reviewer-alert-201810.pdf.

Scope

Definition of Term

Objective of AU-C Section 320

Overview

Materiality and Audit Risk

Requirements

Determining Materiality and Performance Materiality

Revision of Materiality

Documentation Requirements

While AU-C 450 contains guidance on how to use materiality when evaluating the effect of identified misstatements, AU-C 320 offers auditors guidance in using materiality when planning and performing the audit. (AU-C 320-01)

NOTE: The auditor may want to consider the guidance provided in the SEC’s Staff Accounting Bulletin (SAB) 99, Materiality. This SAB addresses the application of materiality thresholds to the preparation and audit of financial statements filed with the SEC and provides guidance on qualitative factors to consider when evaluating materiality.

Source: AU-C 320.09.For the definition related to this standard, see Appendix A, “Definitions of Terms”: Performance materiality.

The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit.

(AU-C Section 320.08)

The concept of materiality recognizes that some matters are more important for the fair presentation of the financial statements than others. In performing the audit, the auditor is concerned with matters that, individually or in the aggregate, could be material to the financial statements. The auditor’s responsibility is to plan and perform the audit to obtain reasonable assurance that the auditor detects all material misstatements, whether caused by error or by fraud.

The FASB’s Conceptual Framework Concept No. 8 says that:

The omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.

This definition is consistent with the definition used by the SEC, the PCAOB, the AICPA, and the U.S. judicial system.

Materiality is entity-specific and is based on the nature and/or magnitude of the item in the context of an individual entity’s financial report. Thus, materiality is influenced by the auditor’s perception of the needs of financial statement users who will rely on the financial statements to make economic decisions. (AU-C 320.04) Specific needs of users may vary widely, and those are not considered.