The calculation of the level of materiality in the audit is the key point of the audit

The audit of the enterprise for its purpose has the identification of any inaccuracies committed intentionally or accidentally, in the financial documents of the enterprise. However, inaccuracies are different, and their size can lead to various kinds of consequences. So, for example, incorrect rounding of the amount on an account of several hundred rubles will not change the cardinal financial picture of the enterprise, but an incorrect calculation of the depreciation rate can significantly distort the real state of affairs. 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 it calculated? The calculation of the level of materiality in the audit is a comparison of the amount of error with the basic indicator and the detection of the percentage error. Thus, using a specially established threshold of materiality, it is possible to determine what errors are relatively safe for the company, and which can lead to a serious distortion of financial information that will subsequently influence the decisions of the company's management.

The calculation of the materiality in the audit is as follows: from the original (incorrect) indicator, the value of the indicator newly calculated by the auditor (correct) is subtracted, 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 value of materiality. After that, he needs to compare the obtained value with the threshold of materiality - a figure above which the materiality becomes too high and lead to serious distortions in reporting. As a rule, in most cases, the threshold of materiality is taken as a value of five percent, however, for certain categories this threshold may change (for example, audit of settlements with extrabudgetary funds implies a lower threshold of materiality, because five percent of all allocations will be too large Amount).

As you know, at the end of the audit, the auditor presents his findings to the management of the enterprise. The calculation of the level of materiality in the audit affects the type of output that the auditor will provide to management. So, if the audit did not reveal any errors and all the statements are accurately compiled, the auditor will give a positive conclusion about the organization of accounting in the enterprise. If violations and inaccuracies exist, however, they do not exceed the materiality threshold (it is sometimes called materiality), then the output will be conditionally positive, that is, it will indicate all the errors and only after their correction the conclusion can be considered positive. A negative conclusion is given if significant errors and errors in the financial documentation are revealed.

It is also important to remember that the importance of materiality will change depending on which indicator will be taken as the base one. For example, if we check transactions on a current account, then for the base indicator it will be possible to take the balance on the account at the end of the reporting period. In this case, the detected errors will have a sufficiently large percentage value. If, for a basic indicator, you take the balance currency, which includes the value of fixed assets, which can exceed the balance of the account by hundreds and thousands of times, then, of course, the error can be considered insignificant. Therefore, when carrying out the calculation of the level of materiality in the audit, it is important to understand what exactly is being checked and what indicator should be chosen as the base one. This will make it possible in the future to avoid claims from the management of the client company of the audit firm and to keep the good name of the audit firm.
We hope that this article has helped our readers to comprehend one of the most important concepts of audit.