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icient for the auditor to use a checklist that has been appropriately tailored to the particular small entity; such a checklist can be reviewed and updated in subsequent years.
.45 The auditor of a small entity is often in a position to have a wide and up-to-date knowledge of the business by virtue of the fact that there may be regular close contact with the owner-manager. This relationship often provides information on matters such as the following:
• The activities of the small entity, its main products and services, and the industry in which it operates.
• The management style, aims, and attitudes of the owner-manager.
• Any plans for changes to the nature, management or ownership of the entity.
• Trends in profitability or liquidity and the adequacy of working capital.
• Legal or regulatory issues facing the entity, including its relationship with the taxation authorities.
• The accounting records.
• The control environment.
.46 Documenting the auditor’s knowledge of the business is equally important in all audits, irrespective of the size of the entity. However, the extent of the documentation depends on the complexity of the entity and the number of persons who will be engaged on the audit. Small entities are ordinarily not complex and their audit rarely
6 AUS 402, “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement” issued in February 2004 contains special considerations in the audit of small entities and is applicable for audits of a financial report for periods commencing on or after 15 December 2004. Paragraphs .44 to .46 of this AGS will be withdrawn when AUS 402 becomes effective. involves large teams of assistants. In many cases the audit may be performed by the audit engagement partner and, perhaps, a single assistant. Therefore, whilst the auditor of a small entity will prepare documentation to a level sufficient to:
(a) Facilitate proper planning of the audit; and
(b) Provide for any change of responsibility within the audit firm, such as changes of audit engagement partner or the departure, illness or incapacity of assistants.
Such documentation will ordinarily be unsophisticated in format and as brief as circumstances allow.
AUS 306: Materiality and Audit Adjustments
.47 “Materiality” means, in relation to information, that information which if omitted, misstated or not disclosed has the potential to adversely affect decisions about the allocation of scarce resources made by users of the financial report or the discharge of accountability by the management or governing body of the entity. Materiality is discussed in Accounting Standards AASB 1031/AAS 5 “Materiality”, Accounting Standards AASB 1001/AAS 6 “Accounting Policies” and Statement of Accounting Concepts SAC 3 “Qualitative Characteristics of Financial Information”
Planning Stage
.48 For audit planning purposes, it is generally necessary to assess materiality from a qualitative and quantitative perspective. One purpose of this preliminary judgement about materiality is to focus the auditor’s attention on the more significant financial report items while determining the audit strategy. As there are no authoritative pronouncements on how materiality is assessed in quantitative terms, the auditor in each case applies professional judgement in the light of the circumstances. One approach to the assessment of quantitative materiality