Materiality

Question 1

Define materiality

Answer 1

An understanding of what is important in financial reporting

How would that impact the judgement of a reasonable person relying on the information

Question 2

The determination of materiality involves both quantitative and qualitative considerations?

Answer 2

True

Question 3

During what phases of the audit is materiality considered?

Answer 3

1) The planning of the audit: The auditor should determine performance materiality
2) Revision during the audit: The auditor should revise materiality for financial statements as a whole and, if applicable, the materiality levels for specific classes of transactions or account balances when the auditor becomes aware of information affecting the initial judgements.

Question 4

Define performance materiality:

Answer 4

The amount set by the auditor at less than materiality for financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of the uncorrected and undetected misstatements exceed materiality for the F/S as a whole

Question 5

Define tolerable misstatement?

Answer 5

The application of performance materiality to a particular sampling procedure

Question 6

With respect to materiality, what should the auditors document?

Answer 6

1) Materiality for the financial statements as a whole
2) Materiality level(s) for particular classes of transactions, account balances, or disclosures, as applicable
3) Performance materiality
4) Any revision of those considerations during the audit

Question 7

Define quantitative guidelines in determining materiality:

Answer 7

auditors frequently apply a variety of “benchmarks” as a starting point in determining the appropriate materiality levels. Examples:

• 5% to 10% of net income or earnings before taxes
• .50% or 2% of the larger of net sales or total assets
• 5% of owners equity for private companies

Question 8

Define quantitative guidelines in determining materiality:

Answer 8

Circumstances may affect perceived risk

• Public versus private companies- A lower materiality may apply to public companies owing to more exposure
• Unstable vs Stable Industry

Question 9

Define a tolerable error or mistatement:

Answer 9

This refers to the maximum error in a population that the auditor is willing to accept.