Specific Independent Auditing Standard No.10 - Audit Materiality

Specific Independent Auditing Standard No.10 - Audit Materiality Chapter 1 General provisions Article 1 This standard is prepared in accordance with the General Independent Auditing Standard to establish standards for Certified Public Accountants ("CPAs") on the application of the principle of materiality in the audit of financial statements and to determine materiality levels. Article 2 The term "materiality" in this standard refers to the seriousness of misstatements or omissions in the entity’s financial statements. The degree of the seriousness may affect the judgement or decisions made by users of financial statements in certain specific circumstances. Article 3 Unless otherwise specified, CPAs should refer to this standard in performing audit work other than the audit of financial statements. Chapter 2 General principles Article 4 The assessment of materiality is a matter of the CPA’s professional judgement. When determining the nature, timing and extent of audit procedures and evaluating the audit results, the CPA should apply the principle of materiality. Article 5 When applying the principle of materiality, the CPA should consider the amounts and nature of any misstatements or omissions. Article 6 The CPA should pay attention to the possibility of misstatements or omission of small amounts that, in aggregate, could have a material effect on the financial statements. Article 7 The CPA should consider the materiality at both the overall financial statement level, and related account balances and transaction levels. Article 8 The CPA should consider the inverse relationship between materiality and audit risk. The higher the materiality level, the lower the audit risk; the lower the materiality level, the higher the audit risk. The CPA should maintain professional skepticism when determining the materiality level. Article 9 The CPA should record the process and the result of the determination of materiality level in the audit working papers. 　 Chapter 3 Assessment of materiality in the preparation of the audit plan Article 10 When preparing the audit plan, the CIIA should make a preliminary assessment of the materiality level to determine, how much audit evidence is required. The lower the materiality level, the more audit evidence should be obtained. Article 11 The CPA should consider, as a whole, the following major factors and, using his audit experience, make a preliminary assessment of the materiality level: (1) the relevant statutory requirements for financial accounting; (2) the entity’s size and the nature of its business; (3) the results of the internal control and audit risk assessments; (4) the nature of and relationship between each item in the financial statements; and (5) the amount and the fluctuation of each item in the financial statements. Article 12 The CPA should choose a reasonable basis for judging the level of materiality and should make use of fixed ratios, variable ratios etc. to determine the level of materiality at the overall financial statement level. The basis usually includes total assets, net assets, operating revenue, net profit etc. Article 13 If the materiality level for different individual statement within the financial statements in the same accounting period is different, the CPA should adopt the lowest one as the materiality level at the overall financial statement level. Article 14 When preparing the audit plan, if the entity has not finished preparing the financial statements, the CPA should refer to the interim financial statements to forecast the annual financial statements or make necessary changes to last year’s financial statements based on the entity’s operating environment and changes in operating conditions, to determine the materiality level at the overall financial statement level. Article 15 Before preparing the audit procedures for account balances or transactions, the CPA may allocate the materiality level at the overall financial statement level to each account balance or each class of transactions, or he may separately determine the materiality level for each account balance or each class of transactions. Article 16 When determining the materiality level for each account balance or each class of transactions, the CPA should consider the following major factors: (1) the nature of each account balance or each class of transactions and the possibility of misstatements or omissions; and (2) the relationship between the materiality level for each account balance or each class of transactions and the materiality level at the overall financial statement level. Article 17 After determining the audit procedures to be performed, if the CPA decides to adopt a lower level of materiality, the level of audit risk increases. The CPA should adopt either or both of the following methods to contain the audit risk to an acceptable level: (1) extend the scope of compliance tests or perform additional compliance procedures to reduce the level of the preliminary assessment of control risk; (2) modify the nature, timing and extent of the substantive procedures to be performed to reduce the detection risk to an acceptable level. Article 18 If there is a modification in the audit plan during the audit, the CPA should reconsider the audit risk and materiality level for some or all of the account balances and transactions. Chapter 4 Considerations on materiality in evaluating the results o the audit Article 19 The materiality level applied by the CPA in evaluating the results of the audit may be different from the materiality level in the preliminary assessment determined at the time of preparing the audit plan .If the former is much lower than the latter, the CPA should reassess the adequacy of the audit procedures performed. Article 20 When evaluating the results of the audit, the CPA should aggregate the detected but uncorrected misstatements or omissions to consider whether their amount and nature would have a material effect on the financial statements. In aggregating the uncorrected misstatements or omissions, the CPA should include both the detected and the projected misstatements or omissions and should also consider whether subsequent events and contingencies have been properly dealt with. Article 21 If the aggregate of the uncorrected misstatements or omissions exceeds the materiality level, the CPA should consider extending the scope of the substantive tests or requesting that the entity adjusts the financial statements to reduce audit risk. Article 22 If the entity refuses to adjust the financial statements or if, after extending the scope of the substantive tests, the aggregate of the uncorrected misstatements or omissions still exceeds the materiality level, the CPA should express a qualified opinion or an adverse opinion. Article 23 If the aggregate of the uncorrected misstatements or omissions approaches the materiality level, the undetected misstatements or omissions, when taken together with the aggregate uncorrected misstatements or omissions, might exceed the materiality level. The CPA should consider performing additional audit procedures or requesting that the entity further adjusts the detected misstatements or omissions to reduce audit risk. Chapter 5 Supplementary provisions Article 24 The Chinese Institute of Certified Public] Accountants is responsible for the interpretation of this standard. Article 25 This standard takes effect from 1 January 1997.