Uniquely in the UK, auditors report publicly on the materiality threshold applied to focus their audit work, disclosing what level of misstatement or omission they consider matters to users of financial statements. Investors welcome this transparency according to the FRC´s latest thematic review.
Audit committees are increasingly engaging with the auditor to understand and agree the materiality threshold used. Investors and audit committees would like auditors to go further in their communications, explain the rationale and impact on the focus of the audit when the materiality threshold is higher than industry norms; uses alternative performance measures as a basis; is lower in the face of internal control weaknesses or has been tailored for specific items and balances.
Today’s report follows up a thematic review in 2013 before the transparency requirements were introduced. The FRC found that audit firms have improved their methodologies and guidance, particularly for certain industry sectors and first year audits.
It remains the case that the differences in methodology, guidance and their application can result in very different thresholds between audit firms. Auditors are therefore encouraged to be more specific with audit committees and in their public reports about the materiality judgements they have made and the impact on the scope, nature and extent of their audit work. The FRC report also highlights key messages for audit committees and audit standard setters.
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