Document ID: chunk:federal_register_of_legislation:F2023C01123:reg:9:p5
Version: federal_register_of_legislation:F2023C01123
Segment Type: reg
Provision Reference: reg 9 (pt 5/9)
Character Range: 18008–21193

Audit risk is a function of the risks of material misstatement and detection risk.[8]  Materiality and audit risk are considered throughout the audit, in particular, when:

(a)                Identifying and assessing the risks of material misstatement;[9]

(b)                Determining the nature, timing and extent of further audit procedures;[10] and

(c)                Evaluating the effect of uncorrected misstatements, if any, on the financial report[11] and in forming the opinion in the auditor's report.[12]

Materiality in the Context of an Audit (Ref: Para. 6)

A2.             Identifying and assessing the risks of material misstatement involves the use of professional judgement to identify those classes of transactions, account balances and disclosures, including qualitative disclosures, the misstatement of which could be material (i.e., in general, misstatements are considered to be material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report as a whole).  When considering whether misstatements in qualitative disclosures could be material, the auditor may identify relevant factors such as:

           * The circumstances of the entity for the period (for example, the entity may have undertaken a significant business combination during the period).

           * The applicable financial reporting framework, including changes therein (for example, a new financial reporting standard may require new qualitative disclosures that are significant to the entity).

           * Qualitative disclosures that are important to users of the financial report because of the nature of an entity (for example, liquidity risk disclosures may be important to users of the financial report for a financial institution).[13]

Determining Materiality and Performance Materiality When Planning the Audit

Considerations Specific to Public Sector Entities (Ref: Para. 10)

A3.             In the case of a public sector entity, legislators and regulators are often the primary users of its financial report.  Furthermore, the financial report may be used to make decisions other than economic decisions.  The determination of materiality for the financial report as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) in an audit of the financial report of a public sector entity is therefore influenced by law, regulation or other authority, and by the financial information needs of legislators and the public in relation to public sector programs.

Use of Benchmarks in Determining Materiality for the Financial Report as a Whole (Ref: Para. 10)

A4.             Determining materiality involves the exercise of professional judgement.  A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial report as a whole.  Factors that may affect the identification of an appropriate benchmark include the following:

           * The elements of the financial report (for example, assets, liabilities, equity, revenue, expenses);

           * Whether there are items