As a member of an audit, everyone must be familiar with the concept of materiality. To better understand materiality, you can refer to Vietnam Audit Standards No. 200 and Vietnam Audit Standards No. 320.
Regarding the professional judgment of auditors in determining materiality levels when planning financial statement audits.
CRITERIA FOR DETERMINING MATERIALITY LEVEL IN AUDIT PLANNING
The main focus is to answer the question “Why do auditors choose this criterion as the starting point for determining materiality rather than another, and what percentage is appropriate?”.
Depending on the type, characteristics of the business, and the structure of the financial statements, the appropriate criteria for determining overall materiality for the Financial Statements are typically chosen from one or several of the following:
- Total revenue
- Total pre-tax accounting profit
- Total expenses
- Total assets
- Owners' equity
- Total revenue: is applied when the enterprise does not yet have stable profits but has stable revenue and revenue is one of the important factors for evaluating operational efficiency.
- Total pre-tax accounting profit: is applied when the enterprise has stable profits. Profit is a criterion that many auditors select because it is the criterion that most report users are most concerned about.
- Total expenses: is applied when the enterprise has no revenue, or is newly established, or for companies in the public utility sector.
- Total assets: is applied to enterprises at risk of bankruptcy, with large accumulated losses relative to their contributed capital, or companies with significant asset investments in heavy industries. Financial statement users may be more concerned about liquidity and debt, making total assets an appropriate criterion.
- Owners' equity: is applied when the enterprises is newly established without revenue or profit, or is undergoing capital restructuring.
CASES TO NOTE WHEN DETERMINING THE MATERIALITY LEVEL IN THE FINANCIAL STATEMENTS AUDIT PLANNING
When determining materiality, the following cases should be noted:
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If the auditor selects multiple criteria to determine materiality, the overall materiality level for the Financial Statements is the lowest value determined from those criteria.
- If the company is incurring losses, the pre-tax accounting profit criterion should not be used to calculate materiality.
- For commercial companies, gross profit or net revenue is typically the criterion selected.
- For service companies, net profit or owners' equity is usually the selected criterion.
RATIOS FOR CRITERIA USED TO DETERMINE MATERIALITY LEVEL IN FINANCIAL STATEMENTS AUDIT PLANNING
Ratio framework for each criterion to determine Overall Materiality for Financial Statements:
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Pre-tax accounting profit: from 5% to 10%
- Total revenue: from 0.5% to 3%
- Total expenses: from 0.5% to 3%
- Total assets: from 1% to 2%
- Owners' equity: from 1% to 5%
The determination of the ratio within the framework depends on the auditor's assessment, based on the experience and consideration of specific information about the business. In some cases, the percentage used to determine materiality may increase or decrease outside the guidance framework if the auditor judges that it is appropriate.
