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SAS
No. 24 Materiality and Audit Risks |
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 Status |
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Issued by Auditing Standards Committee in Taiwan on
13 April, 1993. |
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Summary |
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Audit risk is the risk that the auditor may unknowingly fail to
appropriately modify his or her opinion on financial statements that
are materially misstated. The concept of materiality recognizes that
some matters, either individually or in the aggregate, are important
for fair presentation of financial statements in conformity with
generally accepted accounting principles, while other matters are
not important. The auditor's responsibility is to plan and perform
the audit to obtain reasonable assurance that material
misstatements, whether caused by errors or fraud, are detected. |
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At the account balance, class of transactions, relevant assertion,
or disclosure level, audit risk (AR) consists of (a)
the risk (consisting of inherent risk and control risk) that the
relevant assertions related to balances, classes, or disclosures
contain misstatements (whether caused by error or fraud) that could
be material to the financial statements when aggregated with
misstatements in other relevant assertions related to balances,
classes, or disclosures and (b)
the risk (detection risk) that the auditor will not detect such
misstatements. |
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Inherent risk
(IR)
is the susceptibility of a relevant assertion to a misstatement that
could be material, either individually or when aggregated with other
misstatements, assuming that there are no related controls. The risk
of such misstatement is greater for some assertions and related
account balances, classes of transactions, and disclosures than for
others. |
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Control risk
(CR) is the risk that a misstatement that could occur in a relevant
assertion and that could be material, either individually or when
aggregated with other misstatements, yet will not be prevented or
detected on a timely basis by the entity's internal control. That
risk is a function of the effectiveness of the design and operation
of internal control in achieving the entity's objectives relevant to
preparation of the entity's financial statements. Some control risk
will always exist because of the inherent limitations of internal
control. |
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Detection risk
(DR) is the risk that the auditor will not detect a misstatement
that exists in a relevant assertion that could be material, either
individually or when aggregated with other misstatements. Detection
risk is a function of the effectiveness of an audit procedure and of
its application by the auditor. Detection risk can be disaggregated
into additional components of tests of details risk (TD) and
substantive analytical procedures risk (AP). |
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Detection risk relates to the substantive audit procedures and is
managed by the auditor's response to risk of material misstatement.
For a given level of audit risk, detection risk should bear an
inverse relationship to the risk of material misstatement at the
relevant assertion level. The greater the risk of material
misstatement, the less the detection risk that can be accepted by
the auditor. |
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The auditor should determine a materiality level for the financial
statements taken as a whole when establishing the overall audit
strategy for the audit. Determining a materiality level for the
financial statements taken as a whole helps guide the auditor's
judgments in identifying and assessing the risks of material
misstatements and in planning the nature, timing, and extent of
further audit procedures. |
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In evaluating whether the financial statements are presented fairly,
in all material respects, in conformity with generally accepted
accounting principles, the auditor must consider the effects, both
individually and in the aggregate, of misstatements (known and
likely) that are not corrected by the entity. In making this
evaluation, in relation to particular classes of transactions,
account balances, and disclosures, the auditor should consider the
size and nature of the misstatements and the particular
circumstances of their occurrence, and determine the effect of such
misstatements on the financial statements taken as a whole. |
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The consideration and aggregation of misstatements should include
likely misstatements (the auditor's best estimate of the total
misstatements in the account balances or classes of transactions
that he or she has examined), not just known misstatements (the
amount of misstatements specifically identified). Misstatements
should be aggregated in a way that enables the auditor to consider
whether, in relation to individual amounts, subtotals, or totals in
the financial statements, they materially misstate the financial
statements taken as a whole. |
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Before considering the aggregate effect of identified uncorrected
misstatements, the auditor should consider each misstatement
separately to evaluate:
a.
Its effect in relation to the relevant individual classes of
transactions, account balances, or disclosures, including whether
materiality levels for particular items of lesser amounts than the
materiality level for the financial statements taken as a whole have
been exceeded.
b.
Whether, in considering the effect of the individual misstatement on
the financial statements taken as a whole, it is appropriate to
offset misstatements.
c.
The effect of misstatements related to prior periods. In prior
periods, misstatements may not have been corrected by the entity
because they did not cause the financial statements for those
periods to be materially misstated. Those misstatements might also
affect the current period's financial statements. |
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The risk of material misstatement of the financial statements is
generally greater when account balances and classes of transactions
are subject to estimation rather than precise measurement because of
the inherent subjectivity in estimating future events. |
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There are quantitative and qualitative materiality considerations.
As a result of the interaction of quantitative and qualitative
considerations in materiality judgments, misstatements of relatively
small amounts that come to the auditor's attention could have a
material effect on the financial statements. The auditor must
evaluate whether the financial statements taken as a whole are free
of material misstatement. In making this evaluation, the auditor
should consider both the evaluation of the uncorrected (known and
likely) misstatements and the qualitative considerations. |
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When concluding as to whether the effect of misstatements,
individually or in the aggregate, is material, an auditor should
consider the nature and amount of the misstatements in relation to
the nature and amount of items in the financial statements under
audit. |
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If the auditor believes that the financial statements taken as a
whole are materially misstated, the auditor should request
management to make the necessary corrections. If management refuses
to make the corrections, the auditor must determine the implications
for the auditor's report. |
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If the auditor concludes that the effects of uncorrected
misstatements, individually or in the aggregate, do not cause the
financial statements to be materially misstated, they could still be
materially misstated because of further misstatements remaining
undetected. As the aggregate misstatements approach materiality, the
risk that the financial statements may be materially misstated also
increases; consequently, the auditor should also consider the effect
of undetected misstatements in concluding whether the financial
statements are fairly stated. |
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The auditor can reduce audit risk by modifying the nature, timing,
and extent of planned audit procedures in performing the audit. If
the auditor believes that such risk is unacceptably high, the
auditor should perform additional audit procedures or satisfy
himself or herself that the entity has adjusted the financial
statements to reduce audit risk to an appropriate low level. |
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 Effective
date
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This Statement is effective for audit of financial statements with
fiscal years ending on or after 31 December, 1993. |
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