Audit Risk and Materiality in Conducting an Audit

SAS NO. 107

(Supersedes Statement on Auditing Standards No. 47, Audit Risk and Materiality in Conducting an Audit, as amended, AICPA, Professional Standards.)

CONTENTS OF STATEMENT

Materiality in the Context of an Audit

Users

Nature and Causes of Misstatements

Considerations at the Financial Statement level

Considerations at the Individual Account Balance, Class of Transactions, or Disclosure Level

Determining Materiality for the Financial Statements Taken as a Whole When Planning the Audit

Materiality for Particular Items of Lesser Amounts Than the Materiality Level Determined for the Financial Statements Taken as a Whole

Tolerable Misstatement

Considerations as the Audit Progresses

Communication of Misstatements to Management

Evaluating Audit Findings

Evaluating Whether the Financial Statements Taken as a Whole Are Free of Material Misstatement

Evaluating the Overall Effect of Audit Findings on the Auditor's Report

Communications With Those Charged With Governance

Documentation

Effective Date

1. This Statement provides guidance on the auditor's consideration of audit risk and materiality when performing an audit of financial statements in accordance with generally accepted auditing standards. Audit risk and materiality affect the application of generally accepted auditing standards, especially the standards of fieldwork and reporting, and are reflected in the auditor's standard report. Audit risk and materiality, among other matters, need to be considered together in designing the nature, timing, and extent of audit procedures and in evaluating the results of those procedures.

2. The existence of audit risk is recognized in the description of the responsibilities and functions of the independent auditor that states, "Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected."1 Audit risk2 is the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.3

3. The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for fair presentation of financial statements in conformity with generally accepted accounting principles,4 while other matters are not important. In performing the audit, the auditor is concerned with matters that, either individually or in the aggregate, could be material to the financial statements. The auditor's responsibility is to plan and perform the audit to obtain reasonable assurance that...