Introduction
1. The purpose of this Philippine Standard on Auditing (PSA) is to establish
standards and provide guidance on the concept of materiality and its relationship
with audit risk.
2. The auditor should consider materiality and its relationship with audit risk
when conducting an audit.
3. “Materiality” is defined in the Accounting Standards Council’s "Framework for
the Preparation and Presentation of Financial Statements" in the following terms:
“Information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements.
Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement. Thus, materiality provides a
threshold or cut-off point rather than being a primary qualitative characteristic
which information must have if it is to be useful.”
Materiality
4. The objective of an audit of financial statements is to enable the auditor to
express an opinion whether the financial statements are prepared, in all
material respects, in accordance with an identified financial reporting
framework. The assessment of what is material is a matter of professional
judgment.
5. In designing the audit plan, the auditor establishes an acceptable materiality level
so as to detect quantitatively material misstatements. However both the amount
(quantity) and nature (quality) of misstatements need to be considered. Examples
of qualitative misstatements would be the inadequate or improper description of
an accounting policy when it is likely that a user of the financial statements would
be misled by the description, and failure to disclose the breach of regulatory
requirements when it is likely that the consequent imposition of regulatory
restrictions will significantly impair operating capability.
6. The auditor needs to consider the possibility of misstatements of relatively small
amounts that, cumulatively, could have a material effect on the financial
statements. For example, an error in a month end procedure could be an
indication of a potential material misstatement if that error is repeated each
month.
PSA 320
-2-
7. The auditor considers materiality at both the overall financial statement level and
in relation to individual account balances, classes of transactions and disclosures.
Materiality may be influenced by considerations such as legal and regulatory
requirements and considerations relating to individual financial statement account
balances and relationships. This process may result in different materiality levels
