Audit committees and materiality breakout

Frédéric Tabak of the CSSF explained in a breakout-session “why should audit committees care about materiality in audit? It was an interactive presentation, with Frédéric taking several questions from the audience. After giving short definitions, he moved to describe the recommendations made to audit committees and audit firms. 

He described the concept of “overall materiality” as the amount above which an error or a misstatement in the accounts will influence the decisions of readers of financial statements. “Performance materiality” on the other hand is defined by the auditor as a factor used to avoid the risk that accumulated misstatements taken together exceed overall materiality. Frédéric illustrated these concepts with numerous examples, describing the significance of each.

For example, in the case of overall materiality, if this is set at €30m and the firm has to make an adjustment of €20m the auditor can issue a clean opinion, only reporting the misstatement to the company. There is also the concept of the performance materiality which size will determine the level of diligence the auditor needs to perform on the annual accounts. 

Hence if performance materiality is set to too high, the auditor will do less work, but this will mean less controls being conducted on the accounts. The audience had a discussion about where the audit committee should place these limits. Frédéric recommended resisting the temptation of setting them too high. Although high materiality increases the chance of getting an unqualified audit opinion, it comes with the risk that the accounts feature more significant misstatements.