The audit of the company with its purpose is to identify any inaccuracies committed intentionally or accidentally in the financial documents of the company. However, inaccuracies are different, and their size can lead to various kinds of consequences. So, say, incorrect rounding of the amount in the account of several hundred rubles will not fundamentally change the financial picture of the enterprise, but incorrect calculation of the depreciation rate can significantly distort the real situation. That is why in the practice of inspections one of the key points is the calculation of the level of materiality in the audit.
So, what is materiality, and how is its calculation? The calculation of the level of materiality in the audit is a comparison of the amount of the error with the base indicator and the identification of the percentage of the error. Thus, using a specially established materiality threshold, it is possible to determine which errors are relatively safe for the company, and which can lead to serious distortion of financial information, which will subsequently affect the decisions of the enterprise management.
The calculation of materiality in the audit is as follows: from the initial (incorrect) indicator, the value of the indicator, re-calculated by the auditor (correct) is taken away, the module of this difference is divided by the correct value of the indicator and multiplied by one hundred percent. Thus, the auditor receives a percentage of materiality. After that, he needs to compare the obtained value with the threshold of materiality - a figure above which materiality becomes too high and will lead to serious reporting distortions. As a rule, in most cases, the materiality threshold is set at five percent, however, for certain categories this threshold can change (for example, an audit of settlements with extrabudgetary funds implies a lower materiality threshold due to the fact that five percent of all contributions will be too large amount).
As you know, at the end of the audit, the auditor provides his findings to the management of the enterprise. The calculation of the level of materiality in the audit affects the type of conclusion that the auditor will present to management. So, if during the audit no errors were found and all the reports were drawn up accurately, the auditor will give a positive conclusion about the organization of accounting at the enterprise. If there are violations and inaccuracies, however, they do not exceed the materiality threshold (it is sometimes called materiality), then the conclusion will be conditionally positive, that is, all errors will be indicated in it and only after their correction can the conclusion be considered positive. A negative conclusion is given if significant errors and errors in the financial documentation are identified.
It is also important to remember that the significance of materiality will vary depending on which indicator is taken as the base. Say, if we check the operations on the current account, then for the base indicator it will be possible to take the account balance at the end of the reporting period. In this case, the detected errors will have a sufficiently large percentage value. If we take the balance sheet currency as a base indicator , which includes the cost of fixed assets, which can exceed the amount of the account balance by hundreds and thousands of times, then, of course, the error can be considered insignificant. Therefore, when calculating the level of materiality in an audit, it is important to understand what exactly is being checked and which indicator should be chosen as the base. This will make it possible in the future to avoid claims from the management of the client company of the audit firm and maintain the good name of the audit office.
We hope that this article has helped our readers to get an idea of one of the most important concepts of audit.