Auditing and Ethics: Determining Materiality for Cimic Group Limited Company

Running head: AUDITING AND ETHICS 1
Auditing and Ethics
Name
Professor
Institution
Date

AUDITING AND ETHICS 2
Introduction
The purpose of this paper is to examine the 2017 annual report for Cimic Group
Limited Company and determine the level of materiality that should be used for the group
accounts for the fiscal year ending 2017. This report also represents a preliminary analytical
review on the information that is provided by the company. Key balance sheet and profit and
loss ratios over the period 2014 to 2017 have been addressed. In addition to this, the report
gives a review of the cash flow statement of the company and discusses its primary cash
receipts and cash payments during the year ending 2017.
Section 1: The Level of Materiality to Be Used For the Audit
a. Nature of Materiality
According to the framework of IASB, material information is that whose
misstatement or omission would possibly influence how financial statement users make their
economic decisions based on such financial reports. Therefore, materiality refers to how
significant transactions, errors and balances contained in a company’s financial statements
are. This is a cutoff or threshold which determines whether or not financial information is
relevant for use by users in meeting their decision making needs. Companies must therefore
ensure that information presented on their financial statements is complete and relevant at all
times, and is presented on a fair and true basis that represents the entity affairs. Materiality
highly relates to the size of an individual company, as well as its particular circumstances
(Cim, 2014).

AUDITING AND ETHICS 3
b. What Materiality Represents In Terms of the Audit of a Set of Financial
Statements
In financial statements audit, materiality represents errors or misstatements.
Misstatements or errors in financial statements are often considered as misstatements that
have not been recorded or corrected. In normal audits of financial statements, auditors
identify and report the dollar amount of such errors and misstatements on a schedule in
which normally he lists two categories of errors in financial statements. For instance, he
reports amounts in financial statements which have been recorded incorrectly. These are
transactions which were generally not recorded correctly since they were posted in incorrect
amounts or in wrong accounts (Cim, 2014).
Additionally, the auditor must also report amounts that ought to have been recorded
in financial statements but were not. The auditor is responsible for calculating to an exact
dollar amount the misstatements that have been unrecorded or uncorrected in financial
statements. For errors that are based on an estimated adjustment, they are considered to result
from weaknesses or deficiencies in internal controls. The auditor must therefore consider
reviewing each item against the determined level of materiality with a view to determining
whether or not to make adjustments to financial statements (Media, 2012).
c. Different Bases and Considerations Employed in Arriving at Materiality
In determination of materiality levels, the auditor must consider a number of factors.
For instance, the level of materiality should be in relation to intended uses and purposes of
the financial statements audit. The auditor must clearly understand the financial information
which is considered important and valuable for use by decision makers. For instance, in

AUDITING AND ETHICS 4
regard to solvency or regulatory issues, the level of materiality is highly related to industry
benchmarks in solvency ratios (CIM Group et al., 2015). Additionally, for purposes of
appraisal, the level of materiality is specifically related to net income or net worth of a
company, or its earnings per share (EPS). For general purposes relating to financial
statements, the level of materiality is associated with both the net surplus or the net capital
and the net income (Cimic Group Ltd, 2017).
The level of materiality also varies in accordance with other features or
characteristics of the company, such as its size, access to capital, the stage of organizational
life cycle, its net retention and type of business conducted (whether commercial lines,
personal lines or single line versus multi-line). The financial strength of the company is also
considered since it influences the materiality level. It is generally postulated that as an
organization approaches a given threshold for materiality, the materiality standard for work
in relation to that threshold becomes increasingly rigorous (CIM Group et al., 2015).
d. The Rationale behind Your Choice of a Certain Level of Materiality
Determination of dollar amounts that are considered material to financial statement
users is a matter of professional judgement. A certain percentage is often applied by the
auditor to a chosen benchmark as a preliminary step in determination of the level of
materiality adopted by financial statements in entirety. These benchmarks may either be firm
oriented or industry oriented. For instance, the benchmarks could be based on items such as
gross profit and total revenues (Cimic Group Ltd, 2017).
However, in determining the level of materiality in unrecorded and uncorrected
misstatements in financial statements, the auditor uses several methods based on various