Materiality Concept in Audit of Financial Statements
Verified
Added on  2023/06/07
|6
|989
|338
AI Summary
This article discusses the concept of materiality in audit of financial statements, its importance, and how auditors determine materiality level. A case study on Tabcorp Holdings Limited is also included. The article covers the subject of finance and mentions the course code and college/university are not mentioned.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Finance Assignment
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
1 By student name Professor University Date: 25 April 2018. 1|P a g e
2 Contents Section 1......................................................................................................................................................3 References...................................................................................................................................................5 2|P a g e
3 Section 1 Materiality is the concept, which is inevitable to the audit of the financial statements. It is covered ASA 320 which mentions the responsibilities of the auditor to apply the concept of materiality in planning and performing the audit of the financial statements. It helps in evaluation of the impact of identified misstatement and uncorrected misstatements on the overall financial statements. Misstatements, omissions and errors are considered to be material if it individually or in aggregate, has the ability to influence or change the decision of the users of the financial statements. It can be both qualitative as well as quantitative(Belton, 2017).While determining materiality on quantitative aspect, few steps needs to be followed like set the preliminary materiality judgement which can be a % of sales or income or assets, then consider materiality on line item basis, misstatement to be checked in accounts individually and then on an aggregate basis and then finally compare the aggregate materiality with the assumed level to determine if the accounts are materially misstated. Secondly, if it is determined using qualitative aspect, several things can be taken into consideration like if the company is giving sufficient disclosures in the financial statements, if it is using correct accounting policies, if it gives sufficient disclosure on contingent liabilities or related party transactions(Jefferson, 2017). The concept of materiality is very critical from the perspective of audit of financial statements as it gives reasonable assurance to the users of the financial statements that the same has been prepared as per the Generally Accepted Accounting Principles in all the material respects. It is a matter of professional judgement as to where the line of materiality should be drawn as for a small company $ 10000 can be material, whereas for a large listed company, $ 100000 may not be material(Choy, 2018).While determining the materiality level in the organization, the auditor 3|P a g e
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
4 also considers the internal control within the organization.Some of the methods of determining quantitative materiality level as per ASA 320 and IASB are 0.5% to 1% of gross revenueor sales, 1% to 2% of the total assets, 1% to 2% of the gross profit earned by company, 2% - 5% of the shareholders’ equity balance(Werner, 2017) 5% to 10% of the net profit earned by the company. The company chosen for analysis Tabcorp Holdings Limited is one of the world’s largest listed gaming company and is situated in Australia. It deals in wagering, Keno operating and gaming and has over 1.2 Mn regular customers. The company is being audited by Ernst & Young and in the audit report, the auditors have clearly stated that they have fulfilled their responsibility of Audit of the financial statements and has performed all the procedures that were designed to respond to material misstatements, if any, in the organization(Trieu, 2017).As perthem, the accounts and the financials are showing the true and fair view and are free from errors and material misstatements. The quantitative estimate of the materiality, which may have been used by the auditor whilst auditing the financial statements is shown below in the table: (in $ Mn.) Tabcorp Holdings Limited Quantitative estimate of materiality CriterionBaseAmountMateriality level/range 0.5% to 1% of gross revenueGross Revenue2,234.1011.17 to 22.34 1% to 2% of the total assetsTotal Assets3,740.9018.7 to 37.41 1% to 2% of the gross profitGross ProfitNANA 2% - 5% of the shareholders's equityEquity1,483.407.42 to 14.83 5% to 10% of the net profitNet profit-20.80-0.1 to -0.21 4|P a g e
5 In the given company, there is no gross profit concept, as it is a service company. Furthermore, from the above table, it can be seen that the company had loss during 2017 so net profit also cannot be considered as the base for determination of materiality. Therefore, considering the lower end, 7.5 Mn to 14.5 Mn can be considered for determining materiality(Bizfluent, 2017). This will give the auditor as well as the management a reasonable cushion and idea as to where there can be material errors and accordingly audit planning and processes can be implemented. References Belton, P. (2017).Competitive Strategy: Creating and Sustaining Superior Performance.London: Macat International ltd. Bizfluent. (2017).Advantages & Disadvantages of Internal Control. Retrieved december 07, 2017, from https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.Ecological Economics, 145. Retrieved from https://doi.org/10.1016/j.ecolecon.2017.08.005 Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland . Technological Forecasting and Social Change, 353-354. Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93, 111-124. Werner, M. (2017). Financial process mining - Accounting data structure dependent control flow inference.International Journal of Accounting Information Systems, 25, 57-80. 5|P a g e