Changes to materiality during the year 2362

  • Most will agree that materiality is set as a % of either profit or assets, whichever is the lower. As you approach each new year you set materiality based on the prior year results (I guess.). Fine but what happens if towards year end you realise that profit is 50% that of prior years?%0AMoreover what if that only becomes apparent after year-end?%0AIs that significant enough for you to reassess your scoping? %0AShould balances that were previously not considered material now be reassessed against the new materiality level (based on the new profit figure)? %0AOr do you stick with the original materiality you started the year with?

  • Drastic changes in the assumptions you used for your planning/scoping materiality can indeed cause some problems.%0AFirst, realize there are, at least, two types of materiality we conisder in SOX. First there is the materiality level you use for planning/scoping your test plans. Secondly, there is the materiality level you use in analyzing control deficiencies.%0AIMHO, the first materiality level (planning) typically does not change during the course of the work. Your planning should be based not only on prior years’ results, but your expectations for the current year also. However, in the example you use, a 50% reduction in profit from your original planning assumptions, the use of a Risk Based Approach would lead you to reassess your Risks, and, therefore, your materiality assumptions.%0AThe materiality level you use for analyzing adjustments and control deficiencies should be fluid and subject to adjustment quarterly, dependent on actual results.

  • Thankyou, that is very interesting. I agree with your assessment of the scoping methodology and that unless sometghing changes drastically then you don’t change that (though would a 50% drop in profits be deemed drastic…?). It is also disturbing that this downturn was not anticipated as part of the planning and only became apparent when the final accounts were prepared.%0AI think evaluating deficiencis is where the key impact takes place. It seems strange to me to evaluate deificiencies against measures of materiality calculated using prior year figures. If the current year’s figures are significantly different for no reason other than a downturn in business then I would suggest that identified deificiencies must be evaluated using a new lower materiality level rather than keeping the existing measure. This would also seem logical unless you are convinced that this year is a one off.%0AIf memory serves, when I was an external auditor you started with an assumed materiality which you then reviewed before sign-off to make sure it is not significantly different for the current year. Do you or anybody else on this forum review materiality for the current year before you sign-off SOX or do you stick with the orginal measure that you identified at the planning stage?

  • Do you or anybody else on this forum review materiality for the current year before you sign-off SOX or do you stick with the orginal measure that you identified at the planning stage?’
    I think you and I are in agreement on this point. As I stated in the last sentence of the prior post, your materiality considerations for evaluating deficiencies, adjustments, etc. must change with the actual curent quater/year results.
    However, let’s not oversimplify materiality to an arithmetic execise. At best, setting a ‘materiality level’ at some percentage of a reported amount, i.e. net income or assets, is only a starting point for consideration. In their SAB99, the SEC has a lot more to say on this issue, most of which has to deal with qualitative considerations rather than the simpler quantative measurements. There have been several articles in various forums lately (check and for instance) discussing materiality guidelines and requests for the SEC to provide more guidance. But, the SEC has balked and has basically left the guidance more principle and judgement driven, without providing any suggested quantitative guidelines.

  • It is difficult to comprehend what could create a 50% surprise in results as of year end unless it was the failure of a large contract or sale to come through or there was a material write-down of assets.%0AI don’t know that I would change my materiality threshholds. What I would be more likely to do would be to pull larger samples from the areas where I had the largest shortfalls to the plan or PY as I would want to ensure that those numbers were correct.

  • You raise an interesting point kymike. It shows the importance of the central co-ordinating SOX function to keep an eye actual figures rather than to just assume that the figures calculated using prior year results would remaine relatively unchanged. If the central function does not do that then the tams in the different parts of the business will continue using the original materiality figure oblivious to the fact that there is a downturn in business hence a nasty shock at the end of the year.%0AI agree with your suggestion of increasing the sample size to enable you to reduce the potential deficiency. This will work in most cases although if you’ve already undertaken a 100% test and identified the likely error then I am not sure there is much room to argue that the figure could be any smaller than the error you did find.

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