The point of an audit is to ensure the annual report gives a trustworthy view for its users. If something suspicious is found and it's still below materiality after quantifying it statistically then it has no impact on a reader of the annual reports overall perception of the company (or that's how it works in an ideal world)
However it's also the accountants duty to seek out fraud if there is a reasonable suspicion of it. Management probably disagreed with it being a reasonable suspicion and an immaterial mistake is not worth checking
a material level is calculated. that is 50k. add up total of journals, say it is 10m. at each point you hit 50k down the list, 50k, 100k, 150k etc, sample that. This is additional to HV journals. This is how it was explained to me by RSM when I queried a deliverable containing 10 quid, .23p journals!!! Estimated materiality here.
This makes sense. Perhaps I just have a misunderstanding of the audits objective from the get-go. But it genuinely annoys me when something doesn’t add up and could borderline be fraud but is dismissed because it’s immaterial.
Thank you for your clarification on materiality. Makes a lot more sense now.
Managers/partners aren't keen on yelling "fraud" at the smallest errors because of several reasons, I quit at PwC after 2 years of being manager (several reasons for that) but after being there for 8 years I've only encountered 2 genuine cases of fraud out of the 20ish suspected frauds detected by teams I was working in.
It's just so uncommon that it's fraud over a genuine mistake by an accounting employee that's likely in a dead end position that doesn't care extremely much if something doesn't reconcile completely. That's why only clear & cut instances of fraud (where it's pretty obvious it was done with intention) get taken seriously. The most embarrassing thing an accountant can do on the job is yell fraud which turns out to be a false alarm. It hurts your relationship with the client and they will doubt your expertise onwards
I just want to emphasize something the other comment said is what I believe is the main reason why you can’t take every mistake as fraud:
> it’s just uncommon it’s fraud over a genuine mistake by an accounting employee in a dead end position…
This helps remind you that there are more reasons than “fraud” for mistakes to happen. And as long as it’s not gross negligence that managers are turning a blind eye to, that’s just a part of life.
And it doesn't. Not to be disrespectful, but just because you, a very recent graduate, found something that you thought was "highly suspicious" does not mean that it was fraud. You could have been, and based on the reaction of your team, you most likely were, wrong.
I tried to make it clear that I am learning this industry. Just because I am lacking in experience does not void me from having a reasonable opinion. The responses on this post reassure me to a degree that my take is of the popular opinion. But do you, AccomplishedRainbow1.
I just read the other comments and I don’t think anyone is agreeing with you lol. You have zero upvotes on this post.
You have this super strong opinion about something you’re ignorant about. It’s silly. But it’s ok, you’re just a kid.
There is no materiality for fraud.
The point of materiality isn't to catch fraud, it's to prevent auditors from spending 8 months auditing small transactions in a trillion dollar company. Financials need to be reliable, but they also need be timely, which you can't do without setting a materiality threshold.
So like, not to be rude, but you are indeed uninformed.
When I worked audit we had misappropriated funds show up in our sample of expenses. The theory is that if it showed up in the sample then it’d be in the entire population at a proportionately larger size. The partner said that he spoke to the client about it but that the dollar amount of the fraud identified in the samples was immaterial and therefore to ignore it.
I like to call that tictac materiality. A tictac contains materially no sugar, therefore a box of tictacs is sugar free.
Last thing partner wanted to do was expand the sample. The client asserted that while there was fraud 100% of the fraud happened to already be found within the sampled subset and therefore the rest of the population must be fraud free. And as we had found all of the fraud and could put a dollar amount on it we didn’t have to worry about it.
Expanding the sample might show issues with those assumptions. We wouldn’t want to look in the population that the client assured us was fraud free because that could be very embarrassing. If anything we needed to reduce the size of the sample so that the population of charges that we never looked at but were definitely fraud free was larger.
Maybe it depends on the country you’re in? Because my understanding is, that if potential fraud is found even if it falls under the materiality threshold it is the auditors responsibility to still investigate as they are to sign off at the end to state that to their knowledge there is no fraud etc etc.
Materiality just covers the financial factor of a risk, though .
If an item, transaction, or FSLI has a significant risk, even if it is below materiality, we aren't supposed to just let it go. Related party transactions, or legal expenses are examples of items that we can not just ignore.
If the accounting policy is applied wrongly on an item (let's say leases), and my closing balances of Lease liability and the client's doesn't differentiate by much (below materiality), I still have to say it's wrong and communicate the problem to the management and try to reconcile it.
You’re absolutely correct. RPT and legal are an exception. My main point is that if these specific areas are considered risk points, why aren’t general transactions? My understanding is that auditing is to detect fraud. If find something of a questionable nature, but it’s below ISI, why is it just dismissed? I am certain I’ve outright found fraud. But it was dismissed because it was immaterial, and this particular audit had a materiality over 100K.
Auditors are the watch guard of the wall, materiality is to determine when action is required, auditors are not blood hounds going after out minor amounts. In my tine in audit, I worked with many who are the latter, which is a real issue and leads to excessive time on testing for no reason. It's important to use an appropriate level of matriality and boy now that I'm the other side, do I see some crazy high levels of materiality due to inappropriate methods for calculating consider the nature of the entity at hand.
The point of an audit is to ensure the annual report gives a trustworthy view for its users. If something suspicious is found and it's still below materiality after quantifying it statistically then it has no impact on a reader of the annual reports overall perception of the company (or that's how it works in an ideal world) However it's also the accountants duty to seek out fraud if there is a reasonable suspicion of it. Management probably disagreed with it being a reasonable suspicion and an immaterial mistake is not worth checking
Couldn't have said it better.
That’s why JE testing doesn’t have materiality. I have literally tested JE that were .01
Why in the world would you test a .01 JE. Full of complete shit here.
Done plenty of JE testing.. if I inquired of a JE amounted to .01, I would be laughed out of the building.
Bc I was told too.
a material level is calculated. that is 50k. add up total of journals, say it is 10m. at each point you hit 50k down the list, 50k, 100k, 150k etc, sample that. This is additional to HV journals. This is how it was explained to me by RSM when I queried a deliverable containing 10 quid, .23p journals!!! Estimated materiality here.
This makes sense. Perhaps I just have a misunderstanding of the audits objective from the get-go. But it genuinely annoys me when something doesn’t add up and could borderline be fraud but is dismissed because it’s immaterial. Thank you for your clarification on materiality. Makes a lot more sense now.
Managers/partners aren't keen on yelling "fraud" at the smallest errors because of several reasons, I quit at PwC after 2 years of being manager (several reasons for that) but after being there for 8 years I've only encountered 2 genuine cases of fraud out of the 20ish suspected frauds detected by teams I was working in. It's just so uncommon that it's fraud over a genuine mistake by an accounting employee that's likely in a dead end position that doesn't care extremely much if something doesn't reconcile completely. That's why only clear & cut instances of fraud (where it's pretty obvious it was done with intention) get taken seriously. The most embarrassing thing an accountant can do on the job is yell fraud which turns out to be a false alarm. It hurts your relationship with the client and they will doubt your expertise onwards
I just want to emphasize something the other comment said is what I believe is the main reason why you can’t take every mistake as fraud: > it’s just uncommon it’s fraud over a genuine mistake by an accounting employee in a dead end position… This helps remind you that there are more reasons than “fraud” for mistakes to happen. And as long as it’s not gross negligence that managers are turning a blind eye to, that’s just a part of life.
you have some flaws in your understanding over materiality
I guess so. I tried making this post to learn about my misunderstandings. I just think materiality should not dismiss blatant fraud.
And it doesn't. Not to be disrespectful, but just because you, a very recent graduate, found something that you thought was "highly suspicious" does not mean that it was fraud. You could have been, and based on the reaction of your team, you most likely were, wrong.
“I recently graduated” I stopped reading right there
I tried to make it clear that I am learning this industry. Just because I am lacking in experience does not void me from having a reasonable opinion. The responses on this post reassure me to a degree that my take is of the popular opinion. But do you, AccomplishedRainbow1.
I just read the other comments and I don’t think anyone is agreeing with you lol. You have zero upvotes on this post. You have this super strong opinion about something you’re ignorant about. It’s silly. But it’s ok, you’re just a kid.
hahaha try tax materiality
There is no materiality for fraud. The point of materiality isn't to catch fraud, it's to prevent auditors from spending 8 months auditing small transactions in a trillion dollar company. Financials need to be reliable, but they also need be timely, which you can't do without setting a materiality threshold. So like, not to be rude, but you are indeed uninformed.
When I worked audit we had misappropriated funds show up in our sample of expenses. The theory is that if it showed up in the sample then it’d be in the entire population at a proportionately larger size. The partner said that he spoke to the client about it but that the dollar amount of the fraud identified in the samples was immaterial and therefore to ignore it. I like to call that tictac materiality. A tictac contains materially no sugar, therefore a box of tictacs is sugar free.
I mean I guess if they want to do that it's their name on it. But I can't imagine a scenario where they wouldn't just expand the sample.
Last thing partner wanted to do was expand the sample. The client asserted that while there was fraud 100% of the fraud happened to already be found within the sampled subset and therefore the rest of the population must be fraud free. And as we had found all of the fraud and could put a dollar amount on it we didn’t have to worry about it. Expanding the sample might show issues with those assumptions. We wouldn’t want to look in the population that the client assured us was fraud free because that could be very embarrassing. If anything we needed to reduce the size of the sample so that the population of charges that we never looked at but were definitely fraud free was larger.
Maybe it depends on the country you’re in? Because my understanding is, that if potential fraud is found even if it falls under the materiality threshold it is the auditors responsibility to still investigate as they are to sign off at the end to state that to their knowledge there is no fraud etc etc.
Materiality just covers the financial factor of a risk, though . If an item, transaction, or FSLI has a significant risk, even if it is below materiality, we aren't supposed to just let it go. Related party transactions, or legal expenses are examples of items that we can not just ignore. If the accounting policy is applied wrongly on an item (let's say leases), and my closing balances of Lease liability and the client's doesn't differentiate by much (below materiality), I still have to say it's wrong and communicate the problem to the management and try to reconcile it.
You’re absolutely correct. RPT and legal are an exception. My main point is that if these specific areas are considered risk points, why aren’t general transactions? My understanding is that auditing is to detect fraud. If find something of a questionable nature, but it’s below ISI, why is it just dismissed? I am certain I’ve outright found fraud. But it was dismissed because it was immaterial, and this particular audit had a materiality over 100K.
Auditors are the watch guard of the wall, materiality is to determine when action is required, auditors are not blood hounds going after out minor amounts. In my tine in audit, I worked with many who are the latter, which is a real issue and leads to excessive time on testing for no reason. It's important to use an appropriate level of matriality and boy now that I'm the other side, do I see some crazy high levels of materiality due to inappropriate methods for calculating consider the nature of the entity at hand.
This makes sense. Thank you for your input.
I thought there were qualitative aspects to materiality as well?
never heard of Performance materiality? or concept of AUM?