Acca aa s21 Notes

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8. Guidance on materiality
It’s all very well saying that a matter is material if it would reasonably influence decisions of a user of 
the auditor’s report, but that gives very little guidance to the audit team (or to you when you are 
doing a question).
Therefore, some rules of thumb have been developed. These are only guidelines, but if something is 
wrong to the extent of:
๏
0.5% to 1% of revenue,
๏
1% to 2% of total assets or
๏
5% to 10% of profit
then you should assume that the matter is material. These percentages should take into account the 
auditor’s knowledge of which items users will focus on, the nature of the entity (life cycle/
environment), its ownership, structure and financing and the volatility of the benchmark.
Additionally, a lesser amount should be set for materiality when designing and carrying out audit 
procedures to reduce the risk that misstatements in aggregate exceed financial statement materiality. 
This is known as 
performance materiality
: the materiality that is important in the performance of the 
audit work.
Errors which are less than the suggested guidelines could still be regarded as being material. An error 
which turns a small loss into a small profit could cause unfounded optimism in some situations, 
perhaps a feeling that the company has turned a corner. So, although in absolute terms, the size of an 
error is relatively small, the way in which the accounts are then interpreted could lead to 
unreasonable decisions being made. Therefore, you can talk about both quantitative and qualitative 
materiality.
Finally, there are some amounts in the financial statements where no errors are tolerable. For 
example, there is often a statutory duty to disclose directors’ remuneration and that has to be stated 
with absolute accuracy.
All misstatements identified should be communicated to management who should be asked to 
correct them or to explain why not. The auditors must assess the materiality of uncorrected 
statements and obtain written representations from management that they believe uncorrected 
misstatements to be not material. (see Chapter 28)
If management refuses to correct an error that the auditor thinks is material then the auditor will issue 
a modified (qualified "except for") audit opinion.