Materiality

Question 1

What are the Steps in setting Materiality

Answer 1

Step 1: Identify the users of the financial statements
Step 2: Identify the users’ objectives
Step 3: Determine the base for materiality
Step 4: Identify the % threshold for materiality
Step 5: Determine overall materiality
Step 6: Determine performance materiality
Step 7: Determine specific materiality
Step 8: Determine specific performance materiality

Question 2

What are the guideline for % threshold for Materiality

Answer 2

For-profit entities:
   3% to 7% of normalized income before tax
   1% to 3% of revenues or expenses
   1% to 3% of total assets
   3% to 5% of equity

Not-for-profit entities:
1% to 3% of revenues or expenses
1% to 3% of total assets

Question 3

What is Performance Materiality

Answer 3

The practitioner considers the amount of audit work required to ensure that the identified and potential unidentified misstatements will not exceed overall materiality.

A possible suggested base for PM per PEG is 60% to 80% of overall materiality

PM creates a cushion or safety buffer that ensures any unidentified misstatements or the aggregate of individually identified immaterial misstatements do not exceed materiality.

Question 4

What is specific materiality?

Answer 4

set if there are balances or classes of transactions where an amount less than overall materiality would influence or change the decision of a known user.

SM is used for designing audit procedures that address specific risks and balances in sensitive audit areas