ICAEW report into establishing materiality when providing assurance over non-financial information

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22 Feb, 2016

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a report which highlights the key areas that assurance providers should focus on when establishing materiality levels in order to provide assurance over non-financial information.

The report highlights that when attempting to provide assurance over non-financial information, the objective – “to reduce the risk of a material misstatement of the subject matter to a low level” – is the same as that when assessing financial information.  However, there are challenges in establishing materiality in the context of assessing a non-financial report.

The main focus of the report is around how a practitioner decides what is material in order to be able to determine the level and extent of testing procedures.  The report identifies a number of steps that the practitioner could follow:

  • Gain an understanding of the non-financial report content.  This would include the management process used to develop and define the report content and evaluating and understanding controls that management might have in place around the preparation of the information.
  • Identify what within the non-financial information requires assuring and establish suitable measures to support tests used to evaluate content. 
  • Identify claims and significant claims within the non-financial information.  The practitioner will need to use their understanding of the non-financial information to determine the significant claims investors will rely most upon. 
  • Establish key assertions for each significant claim.  The report notes that for quantitative claims assertions will be existence, accuracy, ownership and presentation – very similar to those when assessing financial information.  For qualitative claims, the report identifies the assertions will typically be completeness, occurrence and accuracy and presentation and understandability.
  • For each significant claim of the subject matter being reported on, identify a materiality threshold (if the subject matter is quantitative) or materiality factors (if the subject matter is qualitative). 

The report highlights that when setting a materiality threshold factors such as the intended needs of the user are important. 

The report also identifies a number of ‘materiality factors’ that should be considered when determining whether there has been a material misstatement of qualitative information.  These would include factors such as: 

  • Has there been an omission of facts? 
  • Has there been a misstatement of facts? 
  • Is there a misrepresentation of trends? 
  • Are claims unsubstantiated?  

For each of these factors the report highlights that “the practitioner needs to obtain sufficient evidence so as to be able to reach a reasonable opinion as to whether the user of the report might have been materially misled”.

The press release and full report are available on the ICAEW website.    

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