You have been asked by the partners of your firm to prepare a draft memorandum on materiality which will provide guidance to members of staff in conducting the audit of the accounts of limited companies. Required: Explain the importance of this concept to the auditor

Materiality is important to an auditor because: –

  •  Auditors should consider materiality and its relationship with audit risk when conducting an audit. The auditors responsibility is to plan and perform an audit to provide reasonable assurance that the financial statements are free of material misstatement and give a true and fair view. Thus anything that would distort the view given by the financial statements must lead to a qualification but only if its material.
  •  Auditors should consider materiality when determining the nature, timing and extent of audit procedures.
    Materiality assessments during planning assists in the determination of an efficient and effective audit approach. It helps the auditor decide on matters such as what items to examine and whether to use sampling techniques.
  •  In evaluating whether the financial statement give a true and fair view, auditors should assess the materiality of the aggregate of uncorrected misstatements.
  •  If the auditor believes that the aggregate of uncorrected misstatements may be material, he should extend his audit procedures to obtain more audit evidence in the relevant area or request management to adjust the financial statements.
    If management refuses any adjustments the auditor should consider the implications for his audit report.
  •  Therefore materiality provides a reference point in making decisions on the effects of misstatements on the financial statements.

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