The Term Material Is of Critical Importance in the Auditing Context - Essay Example

Materiality in Auditing Contents Contents 2 Introduction 3 Discussion 3 The term material is of critical importance in the auditing context 3 “Materiality levels are more secret than the Coca Cola formula” 6 Abstracts in the context of academic research and recent developments in audit regulation and practice 7 Conclusions 9 References 10 Introduction The topic deals with materiality in auditing. The Word materiality signifies as the combination of quantity and quality. The main objective while preparation of the financial statement by the auditor is to focus on the fact and ensure that the financial statement that is prepared covers or includes all the material aspects. Generally in auditing materiality is concerned not only with the quantified amount but the influence that the amount will have related to various contexts. During the course of planning the audit it is the duty and responsibility of the auditor to determine the level or the extent of the materiality. Materiality includes the content of the financial statements and the type of testing that is to be applied. Materiality in relation to Audit refers to as the information that is omitted, or the information that is not disclosed has the capacity to affect adversely the decision relating to the allocation of the scare resources allocated by the users of the financial report or in discharging the accountability of the governing body or the management of the entity. The standard in accounting describes the importance of materiality while making judgments in the presentation and preparation of the financial reports by the entity. The term materiality is mainly applied by the auditor both in performing and planning the audit and also in evaluating the impact of the identified misstatement and non rectified misstatements on the audit. Therefore the main aim or objective of the auditor is to apply the term materiality properly both in performing and planning the audit properly (Griffiths, 2012) Discussion The term material is of critical importance in the auditing context Materiality defines the importance of the financial statement information prepared by the users on the basis of the financial statements. Misstatement is generally considered as material as this impacts or influences the economic decision of the users on the basis of the financial statements. The judgments on materiality are considered in the perspective of the surrounding circumstances that is affected by the nature or the size of the misstatement. Materiality is generally applied by the auditor both in performing and planning the audit and also in evaluating the identified and uncorrected misstatements. Materiality is generally determined by the auditor when the planning fails to determine the amount below which the uncorrected misstatements in individual or as aggregate evaluates it as material. The situations and conditions that is related and connected to some misstatements may impose the auditor in evaluating the misstatements as material even if the misstatements are beyond materiality. The misstatement or the omission of the item included in the financial statement is treated as material if the magnitude of the item in such circumstances has been modified by including the influence of the correct items (Messier, et al., 2005). Figure 1: Different types of materiality The specific materiality as well as the overall materiality that are applied in the International Federation of Accountants serves as a guide for using the International standards on auditing. The overall materiality is used for a selected bench mark that acts as a starting point for determination. Specific materiality is useful in understanding the views and expectation that are changed or modified together with the management and governance in identifying and selecting the particular item which will help in the determining properly the specific materiality level. The specific performance materiality includes the understanding of the entity by the auditor and the limit of the misstatement in the previous audit and also the level of misstatements. Overall materiality in audit is the auditor on the basis of the need of the users of the financial statement prepares the materiality in the financial statement as a whole. The other standards or the factors of materiality is also taken into consideration but it is observed and found out that the materiality that is identified before the calculation of profit before tax is more suitable for the users of the financial statements. Specific materiality is a less value of materiality is ascertained for related parties in the transaction. The term materiality identifies that there are some matters or issues that either in individual or as a aggregate are considered as important for the proper presentation of the financial statements in confirmation to the Generally Accepted Accounting principles. The importance of materiality is that it establishes the value in the report with the help of which it determines the omissions, errors, mistakes are found in the accounts that are considered individually or as cumulated represents that the accounts are complete, accurate and true image of the financial performance and position of an entity (Mock, et al., 2009). Example of materiality in auditing provided by the auditor in the annual report of ITC is the auditor by analyzing the financial statement and all the information’s that are revealed by the company represents the fair presentation of the financial statement and a true and a fair opinion in accordance with the accounting principles that is usually accepted in India. “Materiality levels are more secret than the Coca Cola formula” Materiality level is compared with the secret of the coca cola formula because the materiality in audit as the users of the financial statement may not be able to understand the level of assurance that is decided to be communicated in the auditor’s report. This level of assurance is usually used to relate it with the concept of materiality. Many auditors perceived and believed that the level of assurance and the materiality are considered as the same thing. The user of the financial statement indicates a UN clear understanding the term and applicability of materiality which indicates that the report provided by the auditor do not audit each and everything. The financial analyst found that auditors do not detect all the misstatements. Therefore it is considered that the materiality levels are more secret than that of the coca cola formula (Financial Reporting Council, 2013). The auditor is required to inform the implications and impact of the failure in correcting the misstatements taking into consideration both the quantitative and the qualitative aspects. The auditor is supposed to inform about those who are charged with governance of the uncorrected misstatement by the auditor at the time of audit that the management has determined or identified as immaterial both as individual as well as in aggregate to the financial statement that is considered in whole. Moreover it is required that the research should identify the effect on the users decisions in disclosing the uncorrected misstatements in combination with the auditor’s report (Mock, 2000). The auditor fails to disclose and reveal the misstatement in the report during the audit therefore its materiality is considered with that of Coca Cola as Coca Cola have not revealed their secret formula that the contents of Coca Cola includes a small amount of cocaine in it. Coca Cola did not reveal the addition of cocaine in its drink. This is illegal as cocaine is considered as one of the form of drug and it is also unethical as it is the duty and responsibility of Coca Cola to reveal the fact and provide full and fair disclosures. Auditor is provided with the independence in formulating the auditor’s report therefore it is required by the auditor to provide proper and correct communication about the relationships and the circumstances. Auditors are required to provide a fair definition of the level of assurance that is required to be clearly communicated to the users of the financial statements. The importance and secrecy of materiality can be understood by the fact that materiality is considered to be very important to its users. But the users find no standard for evaluating the impact of the audited financial statements. This is quite understandable to its users because the auditors have to undergo flexibility in providing materiality in decision that depends on the professional judgments and also those decisions that are not revealed either by the management or to the users of the financial statement. Abstracts in the context of academic research and recent developments in audit regulation and practice The main duties and responsibility of Audit is expressing an opinion on the financial statements, internal control over financial reporting. The main recent responsibility of the auditor are planning the audit which includes assembling all the related information that will be useful to the users for decision making, evaluating the process of assessment of the managers that is the process adopted by the management in evaluating the different perspective of the organization. Understanding the internal control more than the financial reporting is considered as the most important responsibility of the audit as it provides reliable and efficient financial report that will comply with the rules and regulations. The internal control comprises of the essential things that generally control the risk of the organization, evaluating the effectiveness of design signifies that the auditor is required to determine whether the company is able to control when they are operated as required by the persons in acquiring the necessary authority and the competence in performing the task effectively and efficiently. In order to satisfy the objectives of the company this will help in detecting the fraud and the error which would lead to the misstatement in the financial statements, testing and evaluating the effectiveness in operating and control this can be defined as the responsibility of the auditor in testing the operating effectiveness of control by determining the competence and the authority to perform effectively, evaluating the deficiencies and developing an opinion on the effectiveness of internal control over the financial reporting (Dauber, 2009). The recent rules that have been set for audit includes auditing standards should be combined with the material provided by the auditors; an effective accountability process in operation, the government is required to establish a system of internal control in order to reduce the risk arising out of the irregularities and errors, the audit is required to be published in such a way that it avoids the conflicting interest between the auditor and auditable entity. Compliance audit helps in examining whether the rules regulations and the orders are consistent and fixed (Gupta, 2004). Example: The federal compliance assistance reveals that the agency cooperation that self disclose and the violations are publicized. These agencies have created an example of the compliance model programs. Many of these agencies generally offer advisory opinions by providing a nominal fee in assisting with the critical regulatory scenario and providing issues on official rulings. The changes in the audit reporting, changed audit practice in relation to the disclosure of materiality is required and it is better because the objective of an audit of financial statements which will enable the auditor in expressing the opinion whether the financial statements can be prepared highlighting all the material aspects in compliance with the financial reporting framework. Conclusions An audit is considered as an independent check of the financial statements. The result of an audit is the auditor’s report on the financial statement by which the auditor expresses an opinion or view that the accounts provide a true and a fair view. The audit report is not treated as a certificate the auditors do not guarantee the financial statement. An audit report cannot provide 100% guarantee of the financial statements of the company. The framework of the financial reporting mainly discusses the term of materiality. Materiality is applicable by the auditor both in performing and planning the impact of the misstatement on the audit. While conducting the audit of the financial statement it is required by the auditor to ensure that the whole financial statements are free from all the material misstatements. The auditor is required to express an opinion regarding the preparation of the financial statements are prepared covering all the material respect in consideration with the financial reporting framework. Materiality mainly defines the importance errors and balances included in the financial statement. References Dauber, N.A. 2009. Wiley The Complete Guide to Auditing Standards, and Other Professional Standards for Accountants. Canada: John Wiley & Sons. Financial Reporting Council (FRC) publication, 2013. Audit Quality Thematic Review – Materiality. [Pdf] Available at: https://www.frc.org.uk/Our-Work/Publications/Audit-Quality-Review/Audit-Quality-Thematic-Review-Materiality.pdf. Griffiths, P. 2012. Risk-Based Auditing. Burlington: Gower Publishing, Ltd. Gupta, 2004. Contemporary Auditing. New Delhi: Tata McGraw-Hill Education. https://frc.org.uk/Our-Work/Publications/Audit-Quality-Review/Audit-Quality-Thematic-Review-Materiality.pdf. [Accessed 6 December 2014]. Messier, W. et al., 2005. A Review and Integration of Empirical Research on Materiality: Two Decades Later, [Pdf] Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=786688. [Accessed 6 December 2014]. Mock, T. et al., 2009. The Unqualified Auditor’s Report: A Study of User Perceptions, Effects on User Decisions and Decision Processes, and Directions for Further Research. [Pdf] Available at: http://www.ifac.org/sites/default/files/downloads/Study__1_ASB_Summary_Report.pdf. [Accessed 6 December 2014]. Mock, T.J., 2009. The Unqualified Auditor’s Report: A Study of User Perceptions, effects on user decisions and decision processes, and directions for further research. [Pdf] Available at: http://www.ifac.org/sites/default/files/downloads/Study__1_ASB_Summary_Report.pdf . [Accessed 6 December 2014]. Read More