1.
Specific Assertion Level Materiality/ Specific materiality/ individual
materiality
Specific materiality refers to the threshold set by the auditor for
particular classes of transactions, account balances, or disclosures that may
be individually material, even if they are below the overall materiality. Ito
ay mga parts ng financial statements na possibly makaapekto sa economic
decisions ng mga users even if they are below the overall materiality.
2. Overall Materiality and Specific Materiality Relationship
Overall materiality is the threshold or limitation for the financial
statements as a whole. The auditor may subtract expected uncorrected
misstatements to determine specific materiality for sensitive areas (e.g.,
related party transactions, revenue recognition). This process ensures focus
on key assertion-level areas - known as ABCOTD: Account Balances, Classes
of Transactions, and Disclosures.
3. Factors Considered in Determining Specific Materiality
ENGLISH: To determine specific materiality, auditors assess:
- Laws and regulations (especially related party rules)
- The financial reporting framework
- Industry-specific disclosures
- Business nature and operations
- The views of governance and management
4. Revisions to Initial Materiality Levels
Before an audit, auditors begin by setting a materiality level—a threshold
that helps them determine what’s significant enough to influence users of
the financial statements.
However, if new information comes to light during the audit (for example,
unexpected risks, significant errors, or changes in financial conditions),
the auditor may realize that the original materiality level isn’t appropriate
anymore.
In that case, the auditor must revise the overall materiality—make it
higher or lower depending on the situation. But this doesn’t stop there.
This revision also requires them to:
• Update performance materiality (the level used to reduce the risk
of undetected errors),
• Adjust specific materiality for certain accounts or disclosures,
• And reassess the audit procedures—meaning they may need to
change what kind of evidence they collect, when they do it, and
how much they do.
Why? Because a change in materiality changes the entire strategy for how
the auditor evaluates the truth and fairness of the financial statements.
5. Effect of Materiality on Audit Procedures
Lower materiality means the auditor is more sensitive to smaller amounts
of error or misstatement. Because even small misstatements could be
considered significant, the auditor needs to perform more detailed and
extensive audit procedures—like checking more transactions, confirming
more balances, or asking for more supporting documents—to reduce audit
risk.
Higher materiality, on the other hand, allows for a higher threshold of what
is considered acceptable. This may reduce the extent of audit testing, since
only larger misstatements would matter. However, it also increases the risk
that smaller but still relevant misstatements might go undetected,
especially if multiple small errors add up.
Conclusion
ENGLISH: Materiality is central to audit planning and execution. By
adjusting thresholds at both the overall and specific assertion levels,
auditors ensure that their work remains focused on areas most likely to
affect users' decisions.
