MATERIALITY Flashcards

1
Q

Materiality

A

Materiality is a concept that recognizes that some matters, either individually or in the aggregate, are important for fair presentation of financial statements in accordance with a financial reporting framework, while other matters are not important.

The auditor’s consideration of materiality is a matter of professional judgment and is influenced by the perception of the needs of the financial statement users.

Materiality judgments involve both quantitative and qualitative considerations

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2
Q

Reasonable Assurance

A

Reasonable Assurance - In performing the audit, the auditor is concerned with matters that, either individually or in the aggregate, could be material to the financial statements.

The auditor’s responsibility is to plan and perform the audit to obtain reasonable assurance that material misstatements, whether caused by errors or fraud, are detected.

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3
Q

Determination of Materiality

A
  • The auditor should determine a materiality level for the financial statements as a whole when establishing the overall audit strategy.
  • The materiality level for the financial statements as a whole helps guide the auditor’s judgments in identifying and assessing the risks of material misstatements and in planning the nature, timing, and extent of further audit procedures.
  • The materiality level does not establish a threshold below which all misstatements are considered immaterial.
  • Certain characteristics of misstatements may cause them to be considered material even though they are below thisthreshold.
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4
Q

Determination of Materiality

A

The determination of what is material to the users is a matter of professional judgment. The auditor often applies a percentage to a chosen benchmark as a step in determining materiality for the financial statements as a whole. When identifying an appropriate benchmark, the auditor considers factors such as:

  • a. the elements of the financial statements (for example, assets, liabilities, equity, income, and expenses) and thefinancial statement measures defined in the applicable financial reporting framework (for example, financial position, financial performance, and cash flows) or other specific requirements,
  • b. whether there are financial statement items on which, for the particular entity, users’ attention tends to be focused,
  • c. the nature of the entity and the industry and economic environment in which it operates,
  • d. the size of the entity, nature of its ownership, and the way it is financed, and
  • e. the relative volatility of the benchmark.
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5
Q

Determination of Materiality

A

When determining materiality, the auditor should consider:

  • prior periods’ financial results and financial positions
  • the period-to-date financial results and financial position
  • budgets or forecasts for the current period, taking into account significant changes in the entity’s circumstances
  • relevant changes of conditions in the economy as a whole or the industry in which the entity operates.
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6
Q

Preliminary Judgment

A
  • The preliminary judgment of materiality is made at the start of an audit.
  • Subsequent judgments regarding the nature, timing, and extent of evidence to be gathered center on this preliminary judgment.
  • The prior year information should be reviewed and adjusted for known changes.
  • The more current the information, the better the estimate.
  • Last year’s information should be updated and materially recomputed as soon as current information is available.
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7
Q

Financial Statement Materiality

A

When establishing the overall strategy for the audit, the auditor should consider whether misstatements of lesser amounts than the financial statement materiality level could reasonably be expected to influence economic decisions of users.

Auditors should consider factors:

  • applicable financial reporting framework, laws, or regulations affect users’ expectations regarding the measurement or disclosure of certain items
  • The key disclosures in relation to the industry and the environment in which the entity operates
  • Whether attention is focused on the financial performance of a particular business segment that is separately disclosed in the consolidating financial statements
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8
Q

Materiality

A
  • A concept that recognizes that some matters, individually or in the aggregate, are important for fair presentation of financial statements in conformity with the applicable financial reporting framework.
  • is a matter of professional judgment influenced by the auditor’s perception of the needs of users of the financial statements.
  • involves both quantitative and qualitative considerations
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9
Q

Materiality

A

The auditor’s opinion that the financial statements are presented fairly in all material respects is for the financial statements as a whole, so materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements

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10
Q

SysTrust

A

SysTrust was developed by the AICPA to provide evidence on the reliability of electronic systems; in a SysTrust engagement the CPA is engaged to examine whether a client maintained effective controls over the system based on Trust Services criteria that have been developed by the AICPA. May provide assurancew on a system’s reliability

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11
Q

Materiality Does Apply

A

Materiality considerations do not apply to:

  • Management’s acknowledgment of its responsibility for fair presentation of financial statements
  • the availability of all financial records
  • the completeness and availability of all minutes and meetings of stockholders, directors, and committees of directors
  • communication from regulatory agencies
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12
Q

Materiality

A
  • 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 judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
  • An 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
  • An 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.
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