By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more. For auditors too, materiality in planning and conducting financial statement audits in accordance with generally accepted auditing standards GAAS has proved challenging.
The GASB statement represents a substantial change in the information preparers provide in such statements, the manner in which they report many transactions and events and the nature and degree of aggregation and disaggregation contained in them. This article discusses current materiality concepts and standards related to the preparation and audit of the basic financial statements of state and local government entities.
In state and local governments, because of recent profound changes in accounting standards and auditing guidance, professional obligations related to materiality considerations have changed significantly and become more complex.
The ASB also has provided guidance to auditors about how the concept of materiality should be applied in financial statement audits. Although the auditor should be alert for misstatements that could be qualitatively material, it ordinarily is not practical to design procedures to detect them.
Based on the relevant professional literature, certain observations can be made:. The consideration of materiality is complex and requires substantial professional judgment in preparing or auditing financial statements. Preparers of financial statements must be concerned with both quantitative and qualitative materiality considerations throughout the process.
Auditors generally design the audit to provide reasonable assurance of detecting quantitatively material misstatements but are responsible throughout the audit for considering whether any misstatements that come to their attention are quantitatively or qualitatively material.
Given these factors it is evident that both preparers and auditors of state and local government financial statements need to clearly understand how to assess materiality. Considering the quality of the internal control, selecting the nature and extent of audit procedures and evaluating the significance of known financial statement misstatements all depend, in part, on materiality determinations.
Further, in any standard like GASB no. G ASB no. At the government-wide level of reporting, it requires financial statements for governmental activities to be presented separately from the financial statements of business-type activities.
For example, governmental activities such as police protection and public education are aggregated and reported separately from business-type activities such as airports and utilities, which also are separately aggregated and reported. GASB no. Although not explicitly addressed in GASB no. If those financial statements are presented in accordance with GAAP, the reader can expect the statement for each unit to be fairly stated. That is, the financial statements of each of the most quantitatively significant based on dollar magnitude funds must be presented in a separate column.
Therefore, the funds selected by the government entity to be reported separately are, in essence, material for their qualitative characteristics. The presence of component unit financial information adds more pieces to the materiality puzzle because component unit financial statements are required to be presented in one or more columns in the government-wide statements of the reporting entity.
Thus, in formulating a solution to the materiality dilemma, it is necessary to consider also the financial reporting objectives of GASB no. That guidance is based on the requirements of GASB standards to report separate financial statements or information for various reporting units see the exhibit below for a summary of such units. The remaining fund information—nonmajor funds, internal service funds and fiduciary funds—may or may not be material. The determination of how the data presented for those reporting units should be assessed would consider relevant qualitative factors and the relationship of the remaining fund reporting units to other appropriate information in the financial statements.
In addition the implementation guide says that major component units are not equivalent to major funds for purposes of assessing materiality. Rather, because GASB no. The implementation guide acknowledges in several of the answers to questions about applying GASB no. As described in SAS no. In audits of commercial entities, determining materiality is somewhat simplified by the fact that every entity presents generally the same basic financial statements: balance sheet, income statement and statement of retained earnings and statement of cash flows.
In contrast to business enterprises, the required financial statements reporting units of government entities may vary from one entity to the next and, in some cases, for the same entity from period to period. The audit guide on state and local governments establishes the concept of opinion units to identify individual units for which the auditor must make materiality determinations when planning, performing, evaluating the results of and reporting in a government audit.
Normally, the opinion units consist of governmental activities, business-type activities, the aggregate discretely presented component units, each major government and enterprise fund and the aggregate remaining fund information that is, nonmajor funds, internal service funds and fiduciary funds.
Because the auditor provides an opinion on each of these units, he or she must make separate materiality determinations for each one. In other words, the auditor must plan and perform the audit to provide reasonable assurance there are no material misstatements of any of the opinion units. This relationship among the basic financial statements, reporting units and opinion units is presented in the exhibit. O ther considerations may complicate the determination of materiality levels.
As an example, paragraph 4. However, the audit guide states that even if a preparer disaggregates this information for evaluation purposes, the auditor should not establish more than one opinion unit for the aggregate opinion unit.
Thus, the auditor is still responsible for providing only reasonable assurance of detecting material misstatements in the aggregate remaining fund information and not the individual disaggregated presentations within that opinion unit. However, the audit guide points out that the opinion units for the aggregate remaining fund information and the aggregate discretely presented component units may include diverse information. For that reason the auditor should consider how qualitative and quantitative factors relating to those aggregate opinion units may affect the nature, timing and extent of audit procedures.
In most audits the auditors treat the aggregate discretely presented component units and the aggregate remaining fund information as separate opinion units.
However, in some audits, the aggregate discretely presented component units may not be qualitatively or quantitatively material to the financial statements of the primary government.
For example, a township the primary government has a single component unit—a small community mental health board—that provides services to residents, the operations of which are immaterial to the township. To order, log onto www. Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.
Several definitions of materiality exist. But the universal premise is that a financial misstatement is material if it could influence the decisions of financial statement users. How do auditors determine materiality? To establish a level of materiality, auditors rely on rules of thumb and professional judgment. They also consider the amount and type of misstatement.
The materiality threshold is typically stated as a general percentage of a specific financial statement line item. Is this error material? Regardless of whether a misstatement of revenue is considered material, it may trigger a material misstatement in accounts receivable. In other words, the balances recorded as due from customers may be materially different from the actual amounts due.
As these examples demonstrate, materiality is a relative concept. What constitutes a material misstatement for one company may not reach the materiality threshold for another. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances.
As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.
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