Accounting Questions and Answers

Answer

Accounting Questions and Answers

Significant changes

             The elimination of AASB 1031 materiality not only changed the AASB108 accounting rules but altered changes in accounting estimates. Materiality refers to the changes in accounting errors and estimates (Cameron 2014). Essentially, when one wants to assess materiality, he or she must adhere to AASB101 requirements of financial statements presentations and AASB108 principles and rules. Although AASB 1031 established the framework for preparing and presenting accounting records, it guidelines lacked information on materiality. As such, as a critical procedure that AASB undertakes to implement the final reporting rules of the International Accounting Standards Board for reporting periods starting on January 2005, the ASSB opted to retain AASB 1031 in an amended format to ensure that the meaning and application of materiality remained well articulated.

            The removal of AASB 1031 requires major changes and amendments to the entire AASB to do away with references to AASB 1031. Until such a time when the mentioned references will have been eradicated, the amended AASB1031 continues to be considered a temporary standard that can apply to other standards and guidelines for preparing and presenting financial records, and contain information on how to deal with materiality (Iskandar, Adwam, Kundari & Ramli 1998).

Materiality and Its Qualitative and Quantitative Guidelines

            Materiality refers to the threshold beyond which an error in financial statements is believed to have an effect on the ability of users to make decisions (DeZoort, Hermanson, & Houston 2003). As a new concept, materiality depends on the size of financial records and decisions that individuals users make. Principally, omission or misstatement can be quantitative or qualitative and therefore the auditor should establish whether there are immaterial misstatements to financial statements. Some of the qualitative guidelines for materiality guidelines encompass the potential impacts of incorrect statements on trends, particularly trends that show probability. Others include possible impacts of the misstatement on the adherence of the company to loan covenants, as well as, other regulatory provisions and contractual agreements. Another critical qualitative guidelines on materiality is the whether there a regulatory or statutory reporting requirements that hinder the magnitudes of materiality. Others encompasses the misstatements that negatively make a single event or transaction to others that consequently influences the information of the users, as well as, the omission or misstatements that is very critical for users’ decision making. With regards to quantitative, some of the guidelines include sales volume, percentage production, efficiency factors, as well as, percentage of total capacity.

Effects of Materiality on Auditors’ professional judgment on misstatements

             As the major basis for auditor’s judgement, ISAs demand that all auditors must gather reasonable assurance on whether the entire financial statements do not have material misstatement (Keune & Johnstone 2012). As such, the constructs and concept of materiality is essential to the auditors as they can apply them at the planning stage and when conducting the audit and assessing the impacts of the identified misstatements on their professional judgement. For instance, in case there are several insignificant amounts of errors that may constitute auditors’ judgement, the auditors may be compelled to change their audit approach and pay attention to events verification.

            Griffin (2014) asserted that when auditors prepare audit plan, they require a particular level of materiality to help them establish critical mistakes and distortions quantitatively thereby making professional judgements on misstatements. As already stated, such misstatements are likely to mislead those using financial statements or can fail to present regulation’s breach where it is evident that restricting the provided guidelines can considerably have negative impacts on the operational capacity of an organization. Therefore, auditors must pay attention to little distortions that when combined could have detrimental impacts on their professional judgements. For instance, a recurring monthly error can harmful to the accuracy of the professional judgements that auditors make using those figures (Cameron 2014). Therefore, auditors must evaluate materiality both conventionally and on specific transactions and accounts that are affected. Moreover, auditors must revise their audit risk when making professional judgements on misstatements because the statements prepared during the planning stage may not depict the issues that emerge during the auditing. Moreover, when errors reach materiality levels, the auditor will consider minimizing the risk by adopting more procedures or ensuring that the management corrects the financial misstatements linked with the statements to be used to make professional judgement. Moreover, the auditors can make professional judgement of misstatements at the planning stage. Therefore, using constructs and concepts of materiality, they can gather new critical information that can help them to make sound decisions or judgements.

Question #4

             During the time when AASB 1031 was issued, the Framework for preparing and presenting financial records had little guidance regarding materiality as compared to AASB 1031 (Cameron 2014). Consequently, as AASB’s means of adopting the international accounting policy required by International Accounting Standards Board (IASB) for financial reporting for periods starting 1 Jan 2005, the AASB opted to retain AASB1031, in a mended format to make sure that the implication and meaning of materiality remained well articulated.   AASB1031 offered a comprehensive guideline on the issue of materiality that auditors must follow to enable them evaluate the risk of material misstatements and help them point out errors and frauds in any financial record based on adequate and essential audit evidences. Principally, materiality assists them to qualitatively and quantitatively examine based on a particular criteria, certain audit evidences when gathered collectively fulfil the true meaning of appropriate and sufficient. This implies that issuance of AASB 1031 offers conventional standards through those auditors can follow to conduct, prepare and present an audit report. Nonetheless, in February 2012, AASB 1031 was withdrawn because AASB was accused of failing to provide unnecessary local procedure on issues required by IFRSs.

            As such, the stated withdrawal did not bring about any disparity in audit procedures since the idea of materiality is already discussed in IFRS and thus the uniformity will continue to be maintained. Moreover, approaches to dealing with issues related to complexity, volume, and detail of disclosures in accounting principles, as well as, other regulatory requirements stress the benefit of offering information to persons using financial reports, which is pertinent and material while similarly avoiding disclosures of immaterial items (DeZoort, Hermanson & Houston 2003). Essentially, these responses depend heavily on the use of materiality and managers, as well as, directors exercising their professional judgement in regards to the disclosure made. Therefore, based on the degree of judgement needed in the accounting, it is necessary that the application of materiality is best attained by issuing guidance instead of accounting standards.