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2009 Seminar for the Appointed Actuary Friday September 18, 2009 MATERIALITY Colloque pour l’actuaire désigné 2009 PowerPoint Presentation
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Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2009 Seminar for the Appointed Actuary Friday September 18, 2009 MATERIALITY Colloque pour l’actuaire désigné 2009. CICA Handbook Section 5142-Materiality Auditing Guideline-41-Applying the Concept of Materiality

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Canadian

Institute

of

Actuaries

L’Institutcanadien

des

actuaires

2009 Seminar for the Appointed Actuary

Friday September 18, 2009

MATERIALITY

Colloque pour l’actuaire désigné 2009

canadian auditing standards
CICA Handbook Section 5142-Materiality

Auditing Guideline-41-Applying the Concept of Materiality

A misstatement is material if it is probable that a financial statement user’s decision will be changed or influenced by the misstatement

Assumes user has a reasonable knowledge of business and economic activities

Misstatements arise from departures from generally accepted accounting principles including:

Departures from fact

Inappropriate determination of accounting estimates

Omissions of necessary information

Misstatements may arise from error or fraud or the consequences of an illegal act

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Canadian Auditing Standards

Page 1

users of financial statements information
Users of financial statements/information

Auditor doesn’t know who they are or what their specific needs are

Therefore, materiality is ultimately a matter of the auditors’ professional judgment based on common needs of users as a group

No bright lines i.e. $1 over is material $1 under is not

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Material

Not Material

May Be Material

Page 2

qualitative vs quantitative factors
Qualitative vs. Quantitative Factors

Misstatements of relatively small amounts could have a material affect on financial statements

Illegal payment

Failure to comply with a regulatory requirement

Related party transactions

Judgments about materiality are made in light of surrounding circumstances and are affected by the size and/or nature of the misstatement

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Page 3

auditors use materiality when
Auditors use materiality when

Determining the nature, timing and extent of audit procedures

Materiality for Planning Purposes

Evaluating the affect of misstatements

Materiality for Reporting Purposes

Materiality for Planning Purposes does not necessarily establish a threshold below which misstatements will be evaluated as immaterial

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Page 4

fraud or error
Fraud or Error

Distinguishing factor is whether the underlying action is intentional or unintentional

Errors are unintentional and include;

Mistakes in gathering or processing data

Incorrect estimates arising from unintentional oversight or misinterpretation of facts

Mistakes in the application of accounting principles

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Page 5

materiality for planning purposes
Materiality for Planning Purposes

A quantitative measure

Select an appropriate benchmark

Income/earnings before tax

Total assets or total revenues

Equity or surplus

Apply an appropriate percentage (KPMG Audit Methodology)

3-10% for net benchmarks

0.5% - 2% for gross benchmarks

(the lower end of these ranges are not floors and may be too high in certain circumstances)

Documented rationale, consistently applied

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Page 6

materiality for planning purposes1
Materiality for Planning Purposes

Factors to be considered in identifying an appropriate percentage:

Ineffective or partially effective control environment

History of material weakness and/or a number of control deficiencies

High turnover of senior management

History of large or numerous misstatements

Complex accounting issues and significant estimates

Multi-location operations

Regulatory requirements and thresholds

Particular focus of financial statement users

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Page 7

planning thresholds for insurance companies
Planning Thresholds for Insurance Companies

Focus on earnings for public companies

Focus on regulatory capital for non-public enterprises

Additional Factors:

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Page 8

evaluation of misstatements identified
Evaluation of Misstatements Identified

Auditor’s view is – they should be corrected

If management and the Audit Committee assess the misstatements as immaterial auditors options are;

Concur and issue an unqualified auditors’ report

Do more audit work to narrow the difference

Qualify the auditors’ report

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Page 9

changes in estimates
Changes in Estimates

Accounting Treatment

Changes in estimates based on new or better information that was not (and should not have been) available in prior periods are not misstatements

Changes in estimates are reported in the period they are identified

Level of precision

The AA’s point estimate is always a specific number within a reasonable range

The level of precision (or the width of the range) varies from entity to entity based on the size and nature of it’s business

The level of precision (plus or minus 5% - 10%) may be higher than the auditors’ materiality

When the auditors’ actuary concludes that the entities recorded estimate falls within a reasonable range, there is no misstatement

However, movement within the range from one period to the next should have a robust rationale

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

Page 10

communication between actuaries and auditors
Communication between Actuaries and Auditors

Required by Auditing Standards and Actuarial Standards

Should discuss both quantitative and qualitative factors affecting each others work

2009 Seminar for the Appointed Actuary

Colloque pour l’actuairedésigné 2009

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