Materiality in auditing

Materiality in Auditing Introduction In every organization, financial auditing plays a vital role. Auditing is a systematic and official examination of the economic actions and events in the organizations or the individuals, and present the accuracy results to users. (Principles of external auditing) The purpose of auditing is to provide an independent data of financial statements, which increases value and credibility of the management. The financial statement differs from company-to-company on the basis of its performance. Decade after decade financial auditing has helped companies to sustain in global business arena with proper ethical consideration. Due to economic turmoil, every company has become more conscious about financial statements and auditing. The mission of the financial audit is to offer credible information for the effectiveness of the decision making process. In auditing function, materiality is an important concept. As per the Council for International Accountancy Standard (IASB), materiality is defined as a “ general code for drawing up and presenting financial statements” (Maria & Franca, n. d.). Materiality is regarded as a financial misstatement. The variation is amid the budgeted and actual cost on the basis of the material purchased. Varied financial institutions and organizations have used materiality to make auditing report perfect (Fields, 2011). Therefore, Financial Accounting Standard Broad has renounced quantitative guidelines for determining materiality in auditing. In general auditing of a company is to provide a fair image of the financial statement. Nowadays, every private organization use materiality to maintain secrecy in financial accounting statements. With the help of auditing systems financial institutes has minimized materiality in company’s financial statements (Baietti & et. al., 2012). It has been minimized by implementing the concept of materiality in the planning as well as final process. Materiality relies on various aspect of element considering situations of erroneous omission or presentation. The objective of this paper is to highlight materiality importance in auditing. Moreover, this study also highlights recent audit regulation, changed audit practice in relation to disclosure of materiality.
Importance of Materiality in Auditing
The audit represents a professional reasoning that can be applied in any domain. The main purpose of discrepancies reported is to control some corrective measures necessary for reduction or elimination of identified discrepancies. The materiality concept depends upon dimension of element or an error considering specific conditions of erroneous omission as well as presentation. The auditor must take into consideration possibility of a significant erroneous presentation of some relatively small values that could accumulate to have a significant effect on financial statements. The materiality is a limit point and main qualitative characteristic is that information must be in order to be useful. The materiality represent value in report, which is determined if errors and mistakes are identified in accounts, to express if the respective accounts offer a true, entire and accurate image of financial position as well as performance of an entity (Baietti & et. al., 2012). As per Anglo-Saxon accountancy, materiality represents error level as well as helps in understanding and interpreting of financial statements, which will not be significantly affected. On the other side, admissible error level is accepted in order to decide whether accounts are correct or not. With the help of materiality multinationals has improved its financial statements. During auditing companies have faced varied kind of misinterpretation. To avoid discrepancies in audit reports the importance of materiality has increased considerably. Moreover, to maintain secrecy in financial statements the importance of materiality has enhanced day-by-day (Jumah, 2009).
Materiality possesses a pervasive effect when it comes to financial statement audit. This means, when conducting any given audit, the auditor has to consider materiality when planning for any audit plus also evaluate the fair way with which he or she is going to present the financial statements while keeping in mind an identified financial reporting framework (Fields, 2011). Materiality also has significant impact when it comes to audit efficiency. In order to become efficient, an editor is not to spend lots of time examining balances when there is no material error. Hence materiality helps in saving unnecessary time which one would spend in attempting to make changes (Siddiqui, 2013).
Auditors Secret Level
In recent times, materiality in auditing has become common in financial organization. To make the audit statement more accurate and useful every auditor has to maintain secret level during the preparation of audit report of a particular company. The audit report is a very important part of every government as well as private organizations. Varied group has made its transaction reports in a different manner for increase effectiveness. Financial auditor is the only person, who prepares financial report in an accurate and fair manner. Nowadays, organizational personnel use companies’ assets for personal use. In this regard, auditor only set the organisational transactions in a proper manner. Therefore, auditors have to be more concerned regarding organisational accounts and its transactions. For instance, it has been seen that Coca-Cola materiality levels are more secret than other multinationals (Coca-Cola Hellenic, 2012). Due to the global economic turmoil multinationals are now more careful regarding materiality in auditing. For this reason, auditors have maintained secrecy during preparing auditing report. From the research, it has found that the auditor of Coca-Cola Company provides error free reports due to independence. On the other side, Tesco PLC auditor has provided materiality audit reports. The audit report recognizes a vital part of an organization. The financial auditor needs to maintain materiality during auditing. The auditors have to maintain secrecy during preparation of audit report of a particular company to avoid materiality through proper planning (Maria & Franca, n. d.).
When an auditor uses materiality, determination of materiality still remains a matter based on professional judgment. When using materiality, one has to consider the item’s nature plus also amount in relation to the financial statements (Ankarath, 2010). Furthermore, he or she needs to consider the financial statement user’s needs. Materiality always has to be put in consideration before doing a detailed audit program. When planning, one has to careful in regard to factors that may influence materiality judgment which may in turn influence audit results (Ankarath, 2010). It is important as an auditor to tackle these factors as they arise during carrying out an audit.
Importance of Secrecy of Materiality
As per Maria & Franca (n. d.), the materiality represent value in audit report with which it determines errors or mistakes identified in accounts. Financial auditors have limited the financial auditor’s liability on the ground of professional reasoning. Arguably, the determined materiality has a relative character, based on which Levitt (1998) argued that companies and their auditors were abusing concepts of materiality in order to manage their earnings. As per Financial Accounting Standard Board’s (FASB) Discussion Memorandum, materiality influences decisions regarding collection, classification summarization of data and measurement as well, concerning results of an enterprise’s economic activity (Nelson, 2013). The concept of materiality has generally been understood to involve determination of importance for financial reporting purposes. Moreover, most of the academic researchers argued that in auditing, materiality is important, as auditors have to maintain secrecy during the presentation of financial statements for a particular company. In the present scenario, materiality is found to be common among financial auditing, wherein, with the help of materiality, multinational companies attempt to prepare error free financial reports in the current situation of economic turmoil. By varied researches, it has been considered that materiality is common among financial audit reports (Mukherjee & Hanif, 2005).
Changed Audit Practice In Relation To the Disclosure of Materiality
In the recent scenario, many multinationals have used materiality to make its financial report error-free and effective than rival companies. To disclose materiality practices from audit, legal institutes have proposed varied requirements, in accordance to which, the auditor shall design and perform further audit procedures, whose nature, extent and timing will be based on and responsive to assessed risks of material misstatement as assertion level. As per ISA 240, the auditor may designate an amount, below which misstatements would be clearly trivial. To avoid misstatements among audit reports, legal institutes may suggest proper evaluation thereupon (ISSAI 1320, n. d.). Each individual misstatement of an amount is considered to evaluate its effect on relevant classes of transactions, account balances or disclosures including whether materiality levels for that particular class of transactions, account balances or disclosures. It has further been argued in this regard that the circumstances related to some misstatements may cause auditors to evaluate it as material, individually or when considered together with other misstatements accumulated during audit (Philips, 2007). As argued by Previits (2008), materiality in the financial audit affects ratio used to evaluate entity’s financial position, results of operations or cash flow. The misstatement has also increased bias among managerial judgments that misleading disclosures or a trend towards duplicative or uninformative disclosures may obscure significant information in financial statements. In subsequence, the auditor shall form an opinion on whether financial statements are prepared in all material respects in accordance with the application financial reporting framework (Previits, 2008).
Correspondingly, to avoid misstatements and uninformative leaks that would further infringe secrecy, legal institutes have used strategies that would further help in improving the current situation. The current change in materiality has herewith ensured positive impacts among audit statements. It is thus argued that materiality has minimized misstatement and biases among auditors. Furthermore, by minimizing misstatements among audit reports have improved financial conditions of organizations. It is in this context that due to economic pitfalls, to survive in global financial market, materiality has emerged as a prime source for enhancing organizational capital. On the other hand, varied financial institutes have used materiality to gain maximum benefits from current capital resources. In this regard, it can be concluded that this change is for the overall betterment of the auditing procedure that would help in assuring secrecy as well as adequate reliability in the process (Rittenberg & et. al., 2011).
Conclusively, it can be comprehended that materiality in auditing is an effective step taken by financial auditors, as with the help of materiality, present organisations have been able to use different kinds of beneficial steps to sustain in the global market. Nowadays, government and private organisations have also been using materiality when calculating transactions. To avoid the risk of misstatements during transactions, legal institutions have also focused on the amendment of varied rules that are intended towards minimizing materiality from auditing reports. To make the auditing reports more transparent, effective and bias free legal institutes have also adopted new procedures. In the past, for varied reasons, materiality was considered in audit reports, which still finds in place in the contemporary accounting practices. For instance, bias to management and offline calculations makes the audit report unmatched from other reports. Therefore, in the present scenario, through technological gadgets, has accounting processed have become more specific than previous times. Materiality in auditing has also minimized risks of misstatement among financial reports.
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