AUDIT MATERIALITY

GENERAL PROVISIONS

01. The purpose of this standard is to prescribe the basic principles and procedures and guide the modes of application thereof to the responsibilities of auditors and audit firms when determining materiality in auditing financial statements and the relationship between materiality and audit risk.

02. When conducting audits, auditors must pay attention to materiality and its relationship with audit risk.

03. This standard shall apply to the audit of the financial statements and also to the audit of other financial information of audit firms.

Auditors and audit firms must observe the provisions of this standard in the process of auditing the financial statements.

The audited units (clients) and the users of audit results must possess necessary knowledge of this standard so as to cooperate in working and handling relationships relating to the determination of materiality of audited information.

The terms in this standard shall be construed as follows:

04. Materiality is the concept used to express the importance of a piece of information (an accounting figure) in the financial statements.

Information is regarded as material if its omission or inaccuracy could influence the decisions of users of the financial statements. Materiality depends on the magnitude and nature of information or error judged in particular circumstances. Materiality is a threshold or cut-off point rather than a content which information must have. Information materiality must be considered both quantitatively and qualitatively.

CONTENTS OF THE STANDARD

Materiality

05. The objective of the audit of financial statements is to enable auditors and audit firms to confirm whether or not the financial statements have been made in accordance with the current (or accepted) accounting standards and regimes, with relevant laws and honestly or rationally reflect material aspects. The determination of the level of materiality is a matter of professional judgment of auditors.

06. When planning audits, auditors must determine an acceptable materiality level to serve as a basis for detecting quantitatively material errors. However, to judge errors as material, auditors must consider them both quantitatively and qualitatively. For example, non-compliance with the current accounting regimes may be considered a material error if it leads to the incorrect presentation of indexes in the financial statements, thus making users of financial information misunderstand the nature of the matters; or the financial statements fail to describe matters relating to non-continuous activities of enterprises.

07. Auditors should consider the possibility of relatively small errors that, if added up, could have a material effect on the financial statements, such as an error in a month-end accounting procedure may become a potential material error if it is repeated each month.

08. Auditors should consider materiality in terms of the extent of erroneousness of the financial statements as a whole in relation to detailed errors in individual account balances, transactions and information disclosed in the financial statements. Materiality may be influenced by other factors such as legal requirements or matters related to different financial statement items and the relationships between these items. In the process of consideration, different materiality levels may be discovered, depending on the nature of matters put forward in the audited financial statements.

09. Auditors must determine materiality when:

a/ Determining the contents, timing and scope of auditing procedures;

b/ Evaluating the effect of errors.

The relationship between materiality and audit risk

10. When planning audits, auditors must consider factors which may give rise to material errors in the financial statements. The auditors’ assessment of materiality relating to account balances and major transactions shall help the auditors determine which items to be examined and decide to use sampling or analytical procedures. The materiality assessment relating to account balances and major transactions shall help the auditors select suitable audit procedures that, when combined, shall reduce audit risk to an acceptable level.

11. There is an inverse relationship between materiality and audit risk in an audit: The higher the materiality level is, the lower the audit risk would be and vice versa. Auditors should take this relationship into account when determining the contents, timing and scope of audit procedures in an appropriate manner, such as when planning audits, if auditors determine that the acceptable materiality level is low, audit risk is increased. In this case, auditors may:

a/ Reduce the assessed level of control risk by carrying out extended or additional tests of control so as to prove the reduced level of control risk; or

b/ Reduce detection risk by modifying the contents, timing and scope of detailed examination procedures already planned.

Materiality and audit risk in evaluating audit evidences

12. The auditors’ materiality and audit risk assessment results at the time of initially planning the audits may be different from the assessment results at different times in the auditing process. Such difference could be attributed to a change in practical circumstances or a change in the auditors’ knowledge of the audited units on the basis of the obtained audit results, such as when the audit is planned before the end of a fiscal year, the auditors have assessed materiality and audit risk on the basis of the enterprises’ anticipated operation results and financial situation. If the enterprises’ actual financial situation and operation results are substantially different therefrom, the assessment of materiality and audit risk will also change. Moreover, when planning audits, auditors usually set the acceptable materiality level lower than that is used to evaluate the audit results in order to increase the possibility to detect errors.

Evaluation of the effect of errors

13. When evaluating the financial statements’ honesty and rationality, auditors must assess whether the aggregate of uncorrected errors which have been detected in the auditing process constitutes a material error or not.

14. The aggregate of uncorrected errors comprises:

a/ Errors detected by auditors in the current year, including those detected in the previous years and not yet corrected in the audit year;

b/ The auditors’ estimation of other errors which cannot be specifically determined (projected errors) in the financial statements of the audit year.

15. Auditors should consider whether the aggregate of uncorrected errors may be material or not. If they conclude that the aggregate of such errors is material, they should take action to reduce audit risk by adding necessary audit procedures or requesting the directors of the audited units to adjust the financial statements.

16. Where the directors of the audited units refuse to adjust the financial statements and the results of application of additional audit procedures permit the auditors to conclude that the aggregate of uncorrected errors is material, they should consider and modify the auditing reports in accordance with Vietnamese Auditing Standard No. 700 “Auditing reports on financial statements.”

17. If the aggregate of uncorrected errors which have been detected approximates the set materiality level, auditors must consider the possibility that whether the undetected errors, when combined with those detected but uncorrected, could constitute material errors or not. In this case, auditors should reduce audit risk by adding necessary audit procedures or requesting the directors to adjust the financial statements to correct the detected errors.