Materiality M6

Question 1

If a CPA have a Overall Materiality range how do you pick the correct end of the range to set Performance Materiality?

Answer 1

• Overall materiality) x’s lower % range provided in audit firm guidance is used when there is a high likelihood of uncorrected and undetected misstatements. Generally, if there is a high likelihood of misstatements then the auditor sets materiality at a lower amount.
• Use the higher range provided in guidance when there is a low likelihood of uncorrected and undetected misstatements.
• Performance materiality should not be higher than overall materiality.

Question 2

What does an Auditor use for preliminary judgement in materiality?

Answer 2

• Based on either annualized interim financial statements or annual financial statements from a previous period.
• Judgments about materiality should include consideration of the nature of the item. For example, an illegal payment is significant regardless of dollar amount.
• Materiality is defined as the amount of error or omission that would affect the judgment of a reasonable person.

Question 3

What are the elements of materiality?

Answer 3

• The auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements.
• The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for the fair presentation of financial statements in conformity with GAAP, while other matters are not important.
• Materiality judgments involve both quantitative and qualitative considerations.
• The auditor’s consideration of materiality is influenced by his or her perception of the needs of a reasonable person relying on the financial statements.
• Materiality for the group financial statements should be higher, not lower, than component materiality.
• If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should consider whether the audit plan needs to be modified.

Question 4

When is materiality levels originally set?

Answer 4

While developing an audit strategy, the auditor determines the level of materiality for the client’s financial statements as a whole

Question 5

What is performance materiality?

Answer 5

Certain Account Balances, Transactions, and Disclosures.

• There are certain situations in which one or more classes of transactions may have materiality levels that are set lower than the financial statements as a whole.

Question 6

What is the difference in performance and overall materiality?

Answer 6

You use performance materiality to compare against 1 account, you use overall materiality at the end when you are summing up total misstatements.

Question 7

When would a Auditor reevaluate a clients materiality level after already set?

Answer 7

• If materiality levels were based on preliminary or estimated data, they should be revised when the actual amounts are known.
• If changes have occurred that will likely affect the investor’s perception about the financial information, the materiality level should be revised accordingly.

Question 8

What would a Auditor most likely use in it’s Preliminary Judgement of materiality?

Answer 8

The auditor would most likely use the entity’s financial statements of the prior year in the preliminary determination of materiality.