Qualitative Considerations for Allocating Materiality to Components in a Group Audit

Editor’s note: This is the second article in a series of articles about application of the group audits standard. For the first article in the series, see “The Scoop on Group Audits: You May Have Them, Even Though You Think You Don’t.”

There is a lot to consider when evaluating the allocation of materiality to components in a group audit.

An auditor may ask: “If I am the only auditor involved, how do I allocate materiality to significant components? After all, I am auditing everything in the group-reporting entity, so why can’t I just use group materiality?”

Fortunately, the answers to these questions can be found in the clarified auditing standards and related AICPA guidance.

The concept of applying materiality in an audit is not new. In both the preclarity and clarified audit standards, materiality is determined at the financial statement level; followed by various decisions about how to apply materiality in the context of planning the audit, performing audit procedures, and forming an opinion as a result of those audit procedures.

For example, performance materiality is set by the auditor at less than materiality for the financial statements as a whole to reduce aggregation risk (i.e., “the risk that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds materiality for the financial statements as a whole”) to an acceptably low level.

Performance materiality also refers to the amount or amounts set less than the financial statement materiality level for purposes of applying procedures to particular classes of transactions, account balances, or disclosures.

In addition, auditors have long wrestled with the question of how to allocate materiality among decentralized subsidiaries included in the financial statements of large consolidated companies. In some instances, if the systems are centralized and risks of material misstatements among subsidiaries are similar, the auditor may be able to perform audit procedures at the consolidated level.

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Dave Hinshaw
Partner, Professional Standards Group
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