Audit fees and timings can sometimes feel difficult to predict and one of the reasons for this is materiality.
Materiality is a technical concept that has a very real impact on how we as auditors plan our work, what we test, how much evidence we need and how we respond when issues are found.
In turn, this can affect how long it takes us to do an audit, how much work is required and what the audit may cost.
In simple terms, materiality is about whether an error, omission or uncertainty could influence the decisions of someone reading the accounts.
As auditors, we are not expected to check every transaction, but we focus on whether the financial statements are materially correct.
In other words, do they give a fair and reliable picture of the business?
Materiality helps us focus on what matters most based on professional judgement and this can be influenced by factors such as turnover, profit, assets, liabilities, sector and risk.
However, it is not a permission to ignore smaller errors and some issues may still matter because of their nature, frequency or wider impact on the accounts.
Why materiality affects the audit plan
Materiality helps us determine where audit effort is focused during the planning stage.
If revenue, stock or debtors are large or high-risk balances, we may need to spend more time testing them.
On the other hand, if a balance is small and low risk, it may need less work.
The lower the materiality level, the more sensitive the audit becomes to smaller errors which means more testing, more samples, more evidence requests and more time spent resolving queries.
This is why two businesses of a similar size may not always have the same audit experience.
One may have straightforward records, clear reconciliations and low-risk balances while the other may have complex revenue streams, uncertain stock values, rapid growth or unusual transactions.
The audit work required for each may, therefore, be very different.
How materiality links to audit fees
Audit fees are usually based on the expected time, complexity and level of risk involved in the work.
Where materiality is lower, we may need to test smaller items and investigate more differences.
This can happen where profits are low or volatile, where the business has changed significantly, where there are concerns around internal controls or where the accounts include sensitive areas such as going concern, loan covenants or director transactions.
Some areas may also need more detailed testing because of their nature, not just their value.
Revenue recognition, stock valuation, related party transactions, bad debt provisions, unusual journals and going concern assumptions can all require a more in-depth look.
Poor records can also increase the time spent on the audit and if reconciliations are incomplete, supporting documents are missing or explanations are unclear, we may need to spend longer getting comfortable with the figures.
How materiality affects timescales
Materiality can also affect how quickly an audit moves from planning to completion.
If materiality is lower or risks are higher, we may need to test more transactions or obtain more supporting evidence.
If errors are found, we may need to assess whether they are isolated issues or signs of a wider problem.
Even small errors can lead to further questions if they appear repeatedly.
For example, one minor posting error may not cause much concern on its own but if similar issues appear across several areas of the accounts, we may need to do more work to understand whether there is a broader weakness in the process.
Unresolved issues can also delay sign-off if we can’t obtain enough evidence on a material area which stops the audit moving forward.
How to keep audit fees and timescales under control
My advice is to make sure the areas most likely to matter to an auditor are properly prepared, supported and explained before the audit begins.
Before the audit starts, you should review year-end reconciliations, check high-value and high-risk balances and make sure supporting documents are easy to access. Debtor, creditor, stock, payroll and revenue balances should be reviewed carefully, especially where there are estimates, judgements or unusual movements.
It also helps to resolve known issues early and if there have been changes in the business, new funding arrangements, significant transactions, system changes or uncertainty around future trading, these should be discussed with the auditor as soon as possible.
Materiality may sound like an abstract thing we talk about between auditors, but it has a very practical impact on audit work, fees and deadlines.
When your auditor asks for more information, it is usually because they need to reduce uncertainty around an area that could materially affect the accounts and we need enough evidence to support our opinion.
If this happens, clear and quick responses can make a significant difference to both the pace and cost of the audit.
Ultimately, however, the better prepared your records are, and the earlier key issues are discussed, the smoother the process is likely to be.
So, if you are preparing for an upcoming audit, speak to us early in the process so we can help you understand the areas likely to attract attention, identify potential issues before fieldwork begins and make the process as efficient as possible.
To speak with an auditor, please visit our contact page.
