Page 201 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes (e) Factors affecting the industry in which the entity operates.

Example: Economic and competitive conditions, and changes in technology, accounting
practices common to the industry and, if available, financial trends and ratios;
At the Account balance and class of transaction level:

(a) financial statement of accounts likely to be susceptible to misstatement (e.g. a
financial statement of account which required adjustment in the previous
period);
(b) the complexity of underlying transactions which might require the use of the
work of an expert;
(c) the amount of judgment involved in determining account balances;
(d) susceptibility of assets to loss or misappropriation;

(e) the completion of unusual and complex transactions, particularly at or near
year end; and

(f) Transactions not subjected to the normal processing mode.
3. Materiality in Auditing: The concise Oxford Dictionary defines the term “material” as
“important or essential. Whatever is important or essential in a given auditing situation
would automatically be material. It is a relative term and what may be material in one set
of circumstances may not be so in another. The concept of materiality is fundamental to
the process of aggregation, classification and presentation of accounting information.
Questions of materiality arise in various circumstances. The Statement on Auditing Practices
issued by the Institute of Chartered Accountants of India states that the recommendations
contained therein apply primarily to items which are material and significant in relation
to the affairs of a company.

Items of little or no significance may be dealt with as may be found expedient, as it is
neither desirable nor necessary that members should devote their time and energies in
the pursuit of matters of a trivial nature. However, freedom to deal expediently with non-
material items should not extend to a group of items whose cumulative effect on the
accounts may be material or significant.

!

Caution The auditor has to keep this in view while examining the truth and fairness of the
statements of account.
The auditor has to satisfy himself that the statements exhibit a true and fair state of affairs
having regard to all material aspects. At various places of Part II of Schedule VI to the
Companies Act reference is made to materiality and the same is also a matter of importance
in relation to items in the balance sheet.
Materiality in Auditing requires that the auditor should consider all material aspects,
either individual or in aggregate which are relatively important for true and fair view of
financial statements. In this context, the auditor should consider whether the effect of
aggregate uncorrected misstatements on the financial information is material. Qualitative
considerations also influence an auditor in reaching a conclusion as to whether the
misstatements are material.

196 LOVELY PROFESSIONAL UNIVERSITY