Assessing the materiality threshold and scope of auditing procedures: The sector-specific approach

Abstract

Subject. As part of any audit engagement, the auditor needs to obtain reasonable assurance that financial statements are free from material misstatements. For this, they assess the tolerable threshold of errors for financial statements, which, if exceeded, will influence the correctness of users' conclusions and adequacy of their subsequent decisions. International Standards on Auditing guide the assessment of the materiality threshold. However, the approach they stipulate fails to accommodate for the sectoral specifics and distinctions of some audited entities. Objectives. We assess the stable structural correlation of key financial reporting indicators through a sample of 130 agricultural entities operating in the Krasnodar Krai. The study presents a technique for assessing the materiality by variance from the average values of the sector as the size of a company may be. Methods. We apply general and special methods, such as induction, deduction, analysis, synthesis, computational graphics, monographs, algorithms. Results. In some cases, the resultant data appeared to significantly diverge at the estimated materiality level. Having analyzed the causes, we proved the reasonableness of the computations done by out technique. As a conclusion, we sum up strengths and weaknesses of the materiality assessment technique. Conclusions and Relevance. The enhanced materiality assessment technique accommodates for the sectoral specifics of agricultural entities. Assessing the materiality level, we revealed the structural correlation of various assets and liabilities. The technique is based on actual data and adaptable, if needed, to the given algorithm. It is more precise for non-standard entities. The findings can be used in the auditing theory and practice, serve for setting the accounting process and financial reporting in various entities. It will also be useful for the Master's Degree Programs in Economics.