Ch. 5 - Materiality Flashcards
1
Q
Steps to Determine Materiality (8)
A
- Identify users of FS
- Identify users’ objectives
- Determine the base
- Identify the percentage threshold
- Determine overall materiality
- Determine performance materiality
- Determine specific materiality
- Determine specific performance materiality
2
Q
Identify the Users of the FS (examples)
A
- lenders
- shareholders
- potential investors
- management (for compensation)
3
Q
Identify Users’ Objectives (examples)
A
- Banks - will they be able to make payments (profitability)
- shareholders - how is the return on my investment (profitability)
- lenders - do we have collateral (assets)
- management - how big will my bonus be (profitability)
4
Q
Determine the Base (options)
A
- normalized income before tax
- total assets
- total revenues
- total expenses
- total equity
5
Q
Identify the Percentage Threshold for Materiality
- ranges
- purpose of range
A
- normalized income (3-7%)
- revenues/expenses (1-3%)
- total assets (1-3%)
- equity (3-5%)
The range is meant to represent the sensitivity to errors (more sensitive means lower end of range; less sensitive means higher end of range)
6
Q
Determine Overall materiality
- one step before calculation
A
check for non-recurring items that should be removed before calculation
7
Q
Determine Performance Materiality
- why
- suggested calculation
- what impacts PM
A
- to ensure that misstatements (identified and unidentified) will not exceed materiality
- 60-80% of overall materiality
- risk impacts PM, but not overall materiality
8
Q
Determine Specific Materiality
- why used
A
- when certain accounts would have more of an impact on decision making than others
- based on whether the users have certain sensitivities
9
Q
Determine Specific Performance Materiality
- how
A
- is based on the RMM - the higher the risk, lower the SPM; the lower the risk, the higher the SPM
10
Q
relationship b/w materiality and RMM
A
There is no relationship b/w materiality and RMM.
