II. Planning Activities - Materiality Flashcards
*Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
The entity’s financial statements of the prior year.
Note:
Materiality refers to a cutoff amount for a misstatement over which the financial statements would be unfairly presented. In determining this amount, out of the choices given, the most likely source is the prior year financial statements. The statements would provide the auditor with the most information to use in setting materiality.
An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate?
Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.
Note: Based on the question, still try to document the errors, but because of the errors not being material in the aggregated they do not cause the F/S to be misstated.
The auditor is allowed to “pass” on aggregated errors that are not material. This analysis and conclusion must be documented in the audit documentation.
In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity’s income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet.
Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate
Note:
Materiality should be considered in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements. As $10,000 is material to the income statement and that amount is smaller than the $20,000 material to the balance sheet, the smaller amount would be used.
What are some facts about materiality?
- recognizes that some matters are important for fair presentation of financial statements in accordance with GAAP, while others are not.
- The Auditor considers materiality for planning purposes in terms of the SMALLEST aggregate level of misstatements that could be material to any one of the financial statements.
- Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
- auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements
Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
The entity’s annualized interim financial statements.
Note: preliminary judgment about materiality is a judgment about the amount of a misstatement in the financial statements under audit, which would be considered material. It is appropriate and likely, therefore, for the auditor to consider the entity’s annualized interim financial statements in developing such a judgment.
When issuing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the
In order to issue an unqualified opinion, the auditor must be confident that no material misstatements exist in the financial statements. While misstatements may exist, in total they must be believed to be less than a material amount.
When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should
When planning a sample for a substantive test of details, the auditor’s consideration of tolerable misstatement for the sample would be related to the preliminary judgment of materiality.
Note:
- auditor determines the nature, timing, and extent of auditing procedures to be applied in order to obtain reasonable assurance of detecting material misstatements in the financial statements.
- The preliminary judgment of materiality is the auditor’s first estimate of amounts that could be considered to be material.
Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate?
Note: Accordingly, if the auditor revises the planned materiality level at the financial statement level, the auditor should consider whether the planned materiality level(s) for particular classes of transactions, account balances, or disclosures should be revised as well.
Facts about Materiality:
- The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.
- Materiality is a judgment assessed in quantitative and qualitative terms.
- Materiality is a function of the auditor’s perception of user needs.
- Performance materiality is largely established to help provide assurance that several immaterial misstatements do not combine to a material undetected amount of misstatement; accordingly,
- it ordinarily is established at a level lower than that of materiality for the financial statements.
- Not as important as financial stateent materiality.
- quantitative materiality levels are generally considered in terms of the smallest misstatement that could be considered material to any of the financial statements.
- increase in materiality results in a decrease in substantive procedures, not an increase.
- Vice versa, Decrease in Materiality = More substantive Testing
- If there is less materiality then you would need to do more testing, common sense.
- Vice versa, Decrease in Materiality = More substantive Testing
auditing standards state that decreasing the tolerable amount of misstatement will require the auditor to do one or more of the following:
(1) perform auditing procedures closer to the balance sheet date
(2) select a more effective auditing procedure; or
(3) increase the extent of a particular auditing procedure.
In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity’s income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate
Ordinarily it would be difficult to anticipate during the planning stage of an audit whether all misstatements will affect only one financial statement.
- The auditor therefore generally is required to use the lower financial statement figure for most portions of planning.
Auditor most likely perform in the planning stage of an audit?
The auditor should determine a materiality level for the financial statements when establishing the overall audit strategy for the audit.
***Lower acceptable level of materiality is established, auditor should plan more work on individual accounts to
Find smaller misstatements by:
(1) select a more effective auditing procedure,
(2) perform auditing procedures closer to the balance sheet date, or
(3) increase the extent of a particular auditing procedure.
* Ex: By increasing the extent of a procedure concerning an individual account and/or selecting a more effective procedure, the auditor will find the smaller misstatements that in aggregate might exceed his preliminary judgments about materiality. The auditor, therefore, should plan to find smaller misstatements as a lower acceptable level of materiality is established.
When reporting on financial statements that are required to include segment information, the auditor’s quantitative measurement of materiality with respect to segment information should be
Primarily related to the financial statements taken as a whole.
Note: professional standards require that the materiality of segment information is evaluated primarily by relating the dollar magnitude of the information to the financial statements taken as a whole.
Auditor most likely use in determining the auditor’s preliminary judgment about materiality?
The entity’s annualized interim financial statements.
