Establishing Materiality Levels That Reduce Audit Work

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The concepts of materiality included in SAS No. 107 provide a framework for audit quality.  They also provide opportunities for saving time by considering risk of material misstatement at both the financial statement and assertion levels.  Here are some of the time savings opportunities:

  Tolerable misstatement by financial statement classification will affect sample sizes determined statistically or non-statistically.  Using a higher level of tolerable misstatement when risk at the assertion level is low or medium results in fewer individually significant items, smaller sample sizes and less audit work to achieve the desired level of assurance.
  Using a factor of up to 1/3 (or maybe higher!) of tolerable misstatement at the financial statement or assertion levels to determine the lower limit for individually significant items when risk is less than high to moderate allows us to eliminate work by auditing fewer individually significant items.  Account balances on the trial balance,general journal entries, unusual transactions in the general ledger, individual accounts receivable balances and outstanding checks on bank reconciliations that are less than the respective lower limits are examples of applications where testing can be reduced.
  Potential adjustments less than the lower limit can be recorded on an Error Analysis Form for error analysis by the in-charge accountant, thereby limiting the number of proposed adjustments to the trial balance.
  Paper-passed adjustments require no further consideration or documentation.

As most of us know, maximizing time savings on audits usually results from planning decisions that reduce audit work.  Reflecting risks of material misstatement at the financial statement and assertion levels in making materiality decisions during planning can be one of our most significant opportunities to save time!

I've designed Excel practice aids to facilitate materiality, sampling and error-analysis decision making that incorporate the tips above.  If you'd like a copy of these forms, please make a request using the "Contact Us" button on our website, www.cpafirmsupport.com.


 

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