Week 2 - Setting Materiality Levels

Question 1

To set the materiality level, what do auditors need to decide?

Answer 1

The level of misstatement that would distort the view given by the accounts

Question 2

Why is the level often expressed as a proportion of the company’s profits?

Answer 2

Because many users of accounts are primarily interested in the profitability of the company

Question 3

How can materiality be thought of?

Answer 3

In terms of the size of the business - if the company remains a constant size, the materiality level will not change; if the business is growing, the materiality level will increase each year

Question 4

The size of a company can be measured in terms of…

Answer 4

Revenue and total assets, both of which tend not to be subject to the fluctuations which may not affect profit

Question 5

How will auditors usually figure out the preliminary materiality level?

Answer 5

They will often calculate a range of values and then take an average or weighted average of all the figures produced