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Advanced Audit and Assurance – Materiality and Audit work

Relationship between materiality and audit

As I was preparing for the next Advanced Audit and Assurance webinar, one of my students asked me about materiality and the amount of audit work that will be performed. This concept often causes a lot of confusion for CPA candidates so I thought a short blog explaining the concept could help.

advanced audit

It is difficult for candidates to understand why an increase in materiality will cause a decrease in the amount of audit work performed and vice versa. So here is an explanation that I hope will clarify this issue.

Materiality – How it works

When materiality is set at a lower amount, then more things would be considered ‘material’ and thus more things would be scoped in for testing. However, if materiality is set at a larger amount, then there are more items that would be scoped out of the sample selection because it would fall below the higher materiality amount. Thus, the sample would be smaller.

Consider the following example:

Entity A has a debtor’s balance of $100. This balance comprises the following invoices:

– 5 invoices for $2 each

– 4 invoices for $5 each

– 5 invoices for $10 each

– 1 invoice for $20

The total of all these invoices is $100.

Testing at $5

Now if the auditor was testing this debtor and the materiality was set at $5, then the sample size would likely be 10 invoices.

4 invoices of $5 each + 5 invoices of $10 each + 1 invoice of $20 = 10 invoices

All these invoices contain amounts that are equal to or greater than the materiality set.

Testing at $10

But if I increase materiality level to $10….then my sample size will decrease to 6 invoices.

5 invoices of $10 + 1 invoice of $20 = 6 invoices.

The invoices below $10 are not likely to be selected because they are less than the materiality set.

Can you see how the increase in the level of materiality reduced the sample size? In doing so, decreases the audit work that will be performed.

To learn more and get access to support resources for your CPA, check out KnowledgEquity’s Advanced Auditing & Assurance Support for your CPA courses. You can try our CPA Assist for Advanced Auditing & Assurance which includes 10 hours of free content, there are short explanatory videos, module quizzes, webinars and flowcharts to help you embed your knowledge and be able to understand the subject. Plus in our paid courses, you can access all the resources, including practice exams (marked) and an exam preparation webinar – learn more here about our courses. Once you have concepts like these embedded in your knowledge data bank, you will be ready to take on your exam!

Theashen Vandiar

 

July 27, 2017

2 responses on "Advanced Audit and Assurance - Materiality and Audit work"

  1. Excellent explanation Theashen.

  2. Thanks Amanda 🙂
    Let me know if there are other concepts you would like me to explain using this blog format 🙂

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