Audit Materiality In 2020-21 Reporting Season

Audit firms in UAE must be reminded of what factors to take into consideration when defining audit materiality. More importantly, how these factors may prove to be more relevant due to the effects of the pandemic.

The global pandemic has had a lasting impact on the business world that shall change the way many businesses have been operating so far. Auditors shall have to keep the implications of these changes in mind as they determine materiality. While this may be challenging to do, judgments regarding materiality will have to be recognized.

Audit materiality is defined by the auditor during their audit’s planning stage. This is usually done by setting a percentage against a pre-determined benchmark. In some cases, a lower level of overall materiality shall be set in comparison to previous periods. This may warrant a need for applying more stringent testing methods.

For businesses that haven’t been affected by the coronavirus and are expected to remain unaffected, auditors may move forward as they would normally. However, for businesses that are dealing with the negative impacts of the pandemic, auditors shall have to consider permanently revising the benchmark used to determine overall materiality.

Auditors shall have to determine whether the users’ focus has changed or their accounts. This is an important factor to consider since perceptions about these factors have an impact on judgments regarding materiality.

Auditors may have to make changes to materiality it was defined using forecasted information that turned out to be different than the real figures at the year’s end. Changes will also be needed if material audit adjustments have been identified. Additional audit work being undertaken later on will most likely have auditors make changes to materiality as well. Due to all this, auditors will have to give more thought to defining materiality as compared to what they would normally do.

Considerations are duly required for:

• Defining overall materiality along with the suitability of the benchmark being used.
• Performance materiality along with consideration of any increased risk regarding control override, errors, changes in the control environment, or fraud.
• Lower Specific materiality along with consideration regarding the materiality of single line items.
• Misstatement evaluation including the impact left by unadjusted misstatements left in the opening balance and the nature of misstatements.
• Materiality reassessment and its impact on the required audit work.
• Rationale Documentation and considering if all the relevant factors and thought processes have been explained in the audit file.