The concept of materiality in the AICPA Professional Standards has been amended to match the description used by other standard setters and regulators in the United States.
Under new standards issued Thursday by the AICPA Auditing Standards Board (ASB), the description of materiality used in the AICPA standards will substantially match the description used by the U.S. judicial system, the PCAOB, the SEC, and FASB.
Previously, the AICPA standards used a description of materiality consistent with the concept used by the International Accounting Standards Board and the International Auditing and Assurance Standards Board.
The ASB’s new description states that, in general, misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. The auditor’s consideration of materiality is a matter of professional judgment and is affected by the auditor’s perception of the common information needs of the financial statements.
The new description states that for purposes of determining materiality, the practitioner may assume that reasonable users:
a. Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence.
b. Understand that financial statements are prepared, presented, and audited to levels of materiality.
c. Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment, and the consideration of future events.
d. Make reasonable judgments based on the information in the financial statements.
The changes are included in Statement on Auditing Standards No. 138, Amendments to the Description of the Concept of Materiality, and Statement on Standards for Attestation Engagements No. 20, which has the same title.
The changes were made because the ASB believes it is in the public interest for the AICPA to include the same description of materiality used by the U.S. judicial system and other U.S. standard setters and regulators.
The ASB believes that aligning the definition with FASB’s standards will make it consistent with practices used by U.S. firms in an audit engagement. As a result, U.S. practice is neither expected nor intended to change under the new definition.
The SAS and SSAE take effect for periods ending, or for practitioners’ examination or review reports dated, on or after Dec. 15, 2020.
For more information, see the AICPA’s At a Glance summary.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.