Determining Audit Materiality in the Banking Industry – A Knowledge Based Approach

AbstractDetermining the audit materiality is a key step in the planning of the audit process. The authors point out several of the specific issues encountered in determining materiality in financial audit engagements. Based on the authors experience and on best practice standards, a set of rules is presented for computing the audit materiality for clients in the banking industry. There is a two steps process: establishing a computation base for the materiality (e.g. Profit Before Tax) and choosing a certain percentage to be applied to the computation base. Additionally, the authors argue that the rules presented above may be incorporated in the knowledge base of an expert system by constructing production rules (in the form of Horn clauses) that would simulate the rationale of audit professionals. Ultimately, this expert system may be used for guiding auditors in the process of determining audit materiality