Lecture Notes Ch. 9 (ACCT-422)

Lecture Notes Ch. 9 (ACCT-422) - Chapter 9 Materiality and...

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Chapter 9 Materiality and Risk This chapter discusses the concepts of materiality and risk in the audit process. Materiality The importance of the concept of materiality is demonstrated by looking at the scope paragraph of the audit report, which provides that GAAS requires the auditor to obtain reasonable assurance about whether the financial statements are free of material misstatement. As previously defined in Chapter 3, a material misstatement is a misstatement in the financial statements that would affect a decision of a reasonable user of the statements. As shown in Fig. 9-1 on page 251, there is a five-step process to applying materiality. Although I will only briefly discuss the steps, you should be familiar with each step: 1. Setting preliminary judgment about materiality 2. Allocating preliminary judgment about materiality to segments 3. Estimating total misstatement in segment 4. Estimating the combined misstatement 5. Comparing the combined estimate with preliminary or revised judgment about materiality The first step involves setting the preliminary judgment about materiality. Preliminary judgment represents the maximum amount by which the auditor believes the financial statements can be misstated without affecting the decisions of a reasonable user of the statements. It is an estimate established by the auditor during the planning stages of the audit based upon the auditor’s professional judgment (which means that auditors will differ on the appropriate level of preliminary judgment). Throughout the course of the audit, the auditor’s judgment about materiality may change, resulting in a revised judgment about materiality. Setting the preliminary judgment is important in aiding the auditor in determining the amount of evidence to accumulate. If preliminary judgment is set at a relatively low dollar threshold, the auditor will want to accumulate more audit evidence to obtain reasonable assurance that the financial statements do not contain a misstatement exceeding that low dollar amount. Conversely, if preliminary judgment is set at a relatively high dollar threshold, the auditor can accumulate less evidence knowing that he/she has greater leeway with respect to the amount of acceptable misstatement. Thus, an inverse relationship exists between the preliminary judgment threshold amount and the
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This note was uploaded on 04/11/2010 for the course ACCT 422 taught by Professor Blake during the Spring '10 term at MD University College.

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Lecture Notes Ch. 9 (ACCT-422) - Chapter 9 Materiality and...

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