Task 3
Calculating Materiality
Materiality counts. Disclosure builds trust.
Here is the background information on your task
The next thing we need to do is define materiality. There are uniform procedures to determine materiality, and these are laid down by the profession. The various possibilities depend on the client’s characteristics. They may change from year to year as circumstances evolve. Study the various possibilities in the PwC materiality document in the resource section below.
As you will see in the document, clearly audit threshold is a percentage of the calculated materiality figure. In our example, we define anything that is less than 10% of the calculated materiality threshold as trivial. Findings are only discussed with clients when they exceed the clearly audit threshold.
Heads up! Everything that is above this threshold essentially needs to be included within the scope of the audit procedures. Level up first and read through the resources below to get a better understanding.
Here is your task
PwC compiles all findings that require a correction to the accounts in a summary of uncorrected misstatements (SUM) template. The template is used to record the issue in question (first column), the booking record in the general ledger and the impact on earnings, assets and liabilities positions (amounts).
We discuss all uncorrected misstatements with the client. If corrections are made while the audit is ongoing, they are processed and removed from the template.
Your task is to calculate our client’s materiality in a blank Excel sheet based on
- Annual profit before taxes
- Total assets
- Net proceeds form trade
and to state in % the highest and lowest benchmarks in each case.
Points to think about:
- Which measure would you choose? Why?
- Which benchmark in % would you choose? Why?
Resources to help you with the task
In addition to materiality as defined here, a ‘clearly audit threshold’ is also defined. This is a percentage of the calculated materiality figure. In our example, we define anything that is less than 10% of the calculated materiality threshold as trivial. Findings are only discussed with clients when they exceed the clearly audit threshold.
By the way: PwC audit procedures for the entire mandate are set out in a documentation tool. Check out this video to learn how we would handle the task in practice.