Determine Audit Materiality :
SA 320, “Materiality in Planning and Performing an Audit” defines the materiality in the context of an audit. It describes that financial reporting
frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements;
Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or combination of both;
Judgments about matters material to users of the financial statements are based on a consideration of the common financial information needs of
users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.
The determination of audit materiality is a matter of professional judgment and is affected by the auditor’s perception of the financial information needs of users of the financial statements.
SA 320 also defines performance materiality as the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.
When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole. If, in the specific
circumstances of the bank, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser
amounts than the materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures. The auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures.
As per SA 450, “Evaluation of Misstatements Identified During the Audit”, the auditor is required to accumulate material misstatements identified
during the audit, Further, it also requires an auditor to communicate on a timely basis all misstatements accumulated during the audit with the appropriate level of management, unless prohibited by law or regulation and also request management to correct those misstatements. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor should obtain an understanding of management’s reasons for not making the corrections and should take that understanding into account when evaluating whether the financial statements as a whole are free from material misstatement. The auditor is also required to reassess materiality determined in accordance
with SA 320 to confirm whether it remains appropriate in the context of the entity’s actual financial results. Further, he should also determine whether uncorrected misstatements are material, individually or in aggregate. The auditor should unless prohibited by law or regulation communicate with those charged with governance, uncorrected misstatements and the effect that they, individually or in aggregate, may have on the opinion in the auditor’s report. The auditor’s communication should identify material uncorrected misstatements individually.
The auditor should request that uncorrected misstatements be corrected. The auditor should request a written representation from management and, where appropriate, those charged with governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole. A summary of such items shall be included in or attached to the written representation.