French Commercial code
In forceThe professional practice standard on the application of the concept of materiality when planning and performing an audit, approved by the Garde des Sceaux, Minister of Justice, is shown below:
APPLICATION OF THE NOTION OF SIGNIFICANCE WHEN PLANNING AND PERFORMING AN AUDIT
Introduction
1. For the purpose of expressing an opinion on the financial statements, the statutory auditor performs an audit to obtain high-level but not absolute assurance, conventionally referred to as "reasonable assurance", that the financial statements taken as a whole are free from material misstatement, whether by amount or by nature.
2. The purpose of this standard is to define the principles relating to the application by the statutory auditor of the concept of materiality when planning and performing an audit. In addition, the standard "Assessment of Misstatements Identified During the Audit" explains how this same concept is applied by the statutory auditor when considering the impact on the audit of identified misstatements and when assessing the impact of uncorrected misstatements, if any, on the financial statements.
Definitions
3. Misstatement: inaccurate, inadequate or omitted accounting or financial information due to error or fraud. A misstatement arises from a difference between the amount, classification, presentation or disclosure provided in the accounts for an item, and the amount, classification, presentation or disclosure required for that same item by the applicable financial reporting framework.
4. Material misstatement: inaccurate, inadequate or omitted accounting or financial information due to error or fraud of such significance that, alone or in combination, it could influence the judgement of a user of financial or accounting information.
5. Uncorrected misstatements: misstatements other than obviously insignificant ones that the auditor has summarised during the audit and which have not been corrected.
6. Materiality threshold: amount beyond which economic decisions or judgement based on the accounts are likely to be influenced.
7. Planning threshold: threshold of an amount lower than the materiality threshold used by the auditor to define the nature and scope of his work. The planning threshold is set at an amount that reduces to an acceptable level the risk that the amount of uncorrected identified misstatements and undetected misstatements will exceed the materiality threshold.
Concept of materiality in the audit context
8. The concept of materiality is applied by the statutory auditor in planning and performing the audit and in considering the effect of identified misstatements on the audit and, where appropriate, in assessing the effect of uncorrected misstatements on the accounts. It is also applied by the statutory auditor in expressing an opinion on the accounts.
9. The statutory auditor applies the concept of materiality in the context of the audit of the accounts by considering not only the amount of the misstatements but also their nature. The auditor also takes into account the particular circumstances in which the misstatements occurred: the circumstances surrounding certain misstatements may lead the auditor to deem them material even if their amount is not material.
10. The determination of whether a misstatement is material is a matter for the auditor's professional judgement and is influenced by the auditor's perception of the financial information needs of the users of the financial statements.
11. In this context, the auditor is justified in considering that users :
a) Have some knowledge of the entity's activities and its economic environment as well as of accounting and that they will analyse the accounts carefully;
b) Are aware that the accounts are audited taking into account the materiality of the information ;
c) Are aware of the uncertainties inherent in valuing certain amounts based on estimates, the exercise of professional judgement and the consideration of future events; and
d) Make economic decisions based on the information contained in the accounts.
12. To assess the materiality of a misstatement based on its amount, the statutory auditor determines one or more materiality thresholds.
13. In determining the nature and extent of audit procedures to be performed, the statutory auditor uses an engagement planning threshold or thresholds.
Determining the materiality threshold or thresholds
14. When planning the audit, the statutory auditor shall determine a materiality level at the level of the accounts taken as a whole.
15. If, in the specific context of the entity, there are classes of transactions, account balances or disclosures for which misstatements below the materiality level set for the accounts as a whole could influence the judgement of users of the accounts or the economic decisions they make on the basis of the accounts, the statutory auditor will consider whether to also set a lower materiality level(s) for those classes of transactions, account balances or disclosures.
16. In assessing whether materiality levels lower than the materiality level adopted at the level of the accounts taken as a whole are necessary for certain categories of transactions, certain account balances or certain disclosures in the notes to the accounts, the statutory auditor shall in particular take into account:
- sensitive information in the accounts in relation to the entity's sector of activity;
- the existence of accounting rules or legal or regulatory texts specific to the entity or its sector; or
- the completion of particular transactions during the financial year.
17. On the basis of his professional judgement, the statutory auditor identifies relevant criteria on the basis of which, by applying rates or other calculation methods, he determines the materiality threshold or thresholds. These criteria may be, for example:
- profit on ordinary activities;
- net profit;
- turnover;
- shareholders' equity; or
- net debt.
18. The choice of these criteria depends in particular on:
- the structure of the entity's accounts;
- the presence in the accounts of items to which some of the users relying on the accounts are likely to be particularly attentive;
- the entity's sector of activity;
- the entity's ownership structure or its financing;
- their variability over time.
Determining the planning threshold(s)
19. When planning the audit, the statutory auditor shall determine a planning threshold(s) for the engagement.
20. Determining the planning threshold is not just a matter of arithmetic but also of professional judgement. When determining this threshold, the statutory auditor relies on his knowledge of the entity, updated during the performance of risk assessment procedures, and takes into account the risk of misstatement of the current year's accounts in the light, in particular, of the nature and extent of misstatements identified during previous audits. The planning threshold is lower than the materiality threshold. It is generally determined by applying a percentage to the latter.
21. If the statutory auditor has considered it necessary to set one or more materiality thresholds of lower amounts for certain flows of transactions, account balances or information, he determines for this or each of these materiality thresholds a planning threshold.
Modification of materiality thresholds
or planning thresholds during the engagement
22. During the engagement, the statutory auditor reconsiders the materiality threshold or thresholds if he becomes aware of new facts or developments in the entity that call into question the initial assessment of those thresholds. This may be the case, for example, when the threshold or thresholds were determined on the basis of forecasts that differ significantly from actual results.
23. If the statutory auditor concludes that the setting of a lower materiality threshold or thresholds than that or those originally set is appropriate, the statutory auditor shall determine whether it is necessary to change the planning threshold or thresholds, and whether the nature and extent of further audit procedures it has defined remain appropriate.
Documentation
24. The statutory auditor shall include in his file the materiality threshold(s) and the planning threshold(s) that he has selected as well as the criteria taken into account to determine them. He shall also include in his file any changes made to these amounts during the audit and the explanations relating thereto.
