Materiality of an audit report refers to the opinion paragraph of an auditor’s opinion that the financial statements present fairly in all material respects. The opinion implies a degree of imprecision in the reported financial statements. In the financial statements of Canadian Pacific Railway for the year ended in 2015, the materiality principle provided a base for the determination of nature and the scope of audit procedures. The materiality of the company is $ 50,300,300 using 2014 as the base year. The net income for 2014 was $ 65,600,000, which is one percent of the total equity including net assets of management shareholders.
The prejudgment about materiality based on the risk assessment, the company’s control environment, and overall performance, concluded that overall performance materiality is 75 %. The percentage is the tolerance level for misstatement in an individual account balance. It amounts to $ 37,700,000 while the materiality of the base year 2014 was 50 % translating to $ 32,800,000. Canadian Pacific railway had open-ended arrangements and regulations in the year 2014, subjecting it to price regulations at Guernsey. The regulations in price describe a pricing error as 0.5% of net assets. The performance materiality is therefore 50%, which is correspondent to the regulatory pricing error limit. The company was close-ended in 2015, necessitating a reset of performance materiality to 75%.
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The determination of materiality and rationale was based on the company’s equity. This is due to the nature of risk procedures, the timing, and the extent of risk assessment. The company uses equity as a basic performance appraisal for internal and external reports. Therefore, it justifies why equity was used to determine planning materiality. The materiality levels were not amended from those determined at the audit-planning phase because no factors were found to necessitate the move after reassessment of the initial materiality. Application of materiality at a balance level was done to reduce likelihood that the cumulative of uncorrected and unnoticed misstatements could exceed materiality ( Swart, 2013).
The approach of estimating the performance materiality was adopted to ensure the cumulative unnoticed and uncorrected audit differences did not exceed the materiality level. The reporting threshold was a trivial amount below the identified misstatements. The audit differences over $ 2,500,000 were to be reported. The planning materiality was 5%, and differences below this threshold were reported on qualitative reasons. The materiality opinion was informed by an evaluation of uncorrected misstatements against qualitative and quantitative materiality. The scope of the audit was determined by the assessment of audit risk and allocation of the financial statement. The assessment of risk material risk was based on the valuation of investments (Keune & Johnstone, 2012)
Risk of misstatement of fair value of investments existed due to application of inappropriate valuation methods and judgment factors. The internal valuation experts gave an independent valuation of sampled investments to mitigate against the valuation risk. The reasonableness and suitability of valuations were assessed in accordance to the International Financial Reporting Standards. No material instance of use of unsuitable valuation methods or policies was detected. There were no matters arising from the preliminary materiality judgment requiring the attention of Audit Committee. In conclusion, the material judgment revealed no misstatement involving fraud and unintentional errors. The integrity of employees had no impact on materiality. The accounting systems were up to date with modern technology, thereby increasing the level of reliance on the previous year qualified opinion on materiality.
References
Keune, M. B., & Johnstone, K. M. (2012). Materiality judgments and the resolution of detected misstatements: The role of managers, auditors, and audit committees. The Accounting Review , 87 (5), 1641-1677.
Swart, J. J. (2013). Audit materiality and risk: benchmarks and the impact on the audit process/JJ Swart (Doctoral dissertation, North-West University).
