Audit and Assurance Question 2022

Audit and Assurance 1
AUDIT AND ASSURANCE
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Audit and Assurance 2
AUDIT AND ASSURANCE
Question 1
The 1995 standard on materiality was a refinement of Australia’s first standard relating to
materiality which was introduced in 1969. In 1995, the AASB issued AASB 1031- Materiality.
This standard was different from its predecessors as for the first time, all entities preparing
financial reports under the AASB standards were bound to apply the provisions of this standard.
The previous standards were merely advisory opinions or provided non-binding guidance. AASB
1031 1995 provided a definition for materiality and explained the role of materiality in decision
making (Pike, Curtis & and Chui 2013 p. 1420). Further revision of AASB 1031 would be
introduced in 2004. The objective of the 2004 revision was to align the AASB standards with
International Accounting Standards. The AASB was adopting International Accounting
Standards into is framework and consequently there was need to eliminate provisions that did not
match or went against the provisions of IASs. The specific change made to AASB 1031 in 2004
was to decrease the volume of guidance relating to materiality. The IASs notably did not have a
standard dedicated to materiality (Tubbs 2012 p.62). The IASs discussed materiality within IAS
1- Presentation of Financial Statements. This exemplifies how the IASs did not give as much
credence to materiality as the Australian standards did. In order to match or at least be
comparable with the international standards, the AASB reduced the amount of guidance on
materiality provided in AASB 1031. A further revision of AASB 1031 was done in 2013. The
objective of this revision was similar to the 2004 revision which was to align AASB 1031 with
the international standard on materiality. The 2004 revision further reduced guidance on
materiality and only retained specific guidance that was contained in the IFRS. AASB 1031 was
revised further in 2015. The 2015 revision effectively removed the entire standard from AASB’s

Audit and Assurance 3
list of standards. The AASB eventually achieved its objective of matching its standards with the
IAS and IFRS by eliminating the AASB standard that was solely dedicated to materiality.
2.
a. The definition of materiality given by AASB 1031 prior to its withdrawal was that information
is material if when “omitted, misstated or undisclosed could potentially adversely affect
decisions relating to allocation of resources made by users relying on financial reports or
accountability of management or entity’s governing body” (Jennifer, Scott and Yi-Jing 2017
p.90).
b. AASB 1031 provided guidance on how to determine if specific information is material. This
guidance either relates to the quantitative value of the information or the qualitative value of the
information. AASB 1031 identifies 10% and 5% as the thresholds for determining whether
information is material or not. Any amount greater than 10% of a suitable base is regarded to be
material while any amount that is less than 5% is regarded as immaterial. Qualitative value of
information can be used to override the quantitative guidance given by the standard. The nature
of information rather than the quantitative value of the information may be more important under
certain circumstances. A low value transaction may have the potential of affecting the overall
financial performance of the entity or even its ability to continue to operate as a going concern
(Anderson, Kaplan and Reckers 2012 p.9). In such a case the qualitative value of this
information gives it its value to decision makers and to the auditor.
c. Auditors have a fiduciary duty advise users who rely on financial statements to make decisions
on whether the financial statements prepared by management reflect the actual state of affairs.
The financial position and performance presented by management in financial statements by