In: 1 the design of audit procedures for mechanisms to detect misstatements; te pursuit of the elimination of audit risk; ad, te assessment of the risk of material misstatement as the basis for the audit procedures (Bragg, p. Tese variables underscore how materiality forms part of the foundation of sound audit procedures, oe that is capable of addressing errors and risks. Te defined object of audit underscores this as auditors are expected “to carry out procedures designed to obtain sufficient appropriate audit evidence… [in order] to determine with whether the financial statements are free of material misstatement” (Auditing Practices Board 1995, pr.
Agood analogy that could map out the relationship is that materiality is inversely related to risk: al other things being equal, a materiality goes up, adit risk goes down and vice versa (Kearns 2007, pThe overall auditing framework that is achieved with a focus on materiality allows the auditor to identify, ealuate and address risks in the financial reporting as well as in determining whether additional audit is necessary. Areview of literature on materiality and reveals the permeation of materiality as auditing practice and its role in efficacy of financial reporting.
Fr instance, Bennan and Gray (2005, p. 1 outlined how it became imperative through the years such as after the 1990s period, when the US Securities and Exchange Commission (SEC) Chairman Arthur Levitt cited the need to reform “accounting hocus-pocus” and the misapplications of accounting principles. Materiality is critical when evaluating risks and uncertainties in the financial information. Tese are inevitable in preparing financial statements but materiality is able to inform the of in assessing whether the information is true and fair (Brennan & Gray, p Researchers such as Langevoort (2002) and Huang (2005) demonstrated how financial reporting using materiality is critical for stakeholders such as the investors because the decisions made based on financial documents rife with errors will inevitably impact organizational performance because of inappropriate economic decisions.
A important aspect to the issue of risk in materiality-audit relationship is abuse. Mteriality is largely relegated to the judgment of the auditor since the goal is to achieve a certain of flexibility it comes to reporting financial data.
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