ugaud.ch3c - Needing to attain important benchmarks (e.g.,...

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Materiality is the amount of misstatement that probably would have made a difference in the judgment of a reasonable user who is relying on that information. Chapter 3 (91-97): What is materiality ?
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Auditors consider materiality in 3 phases of the audit: planning , Planning Phase (Preliminary materiality judgment): used in developing audit programs helps determine extent and type of audit evidence to gather
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Materiality thresholds should be determined for: Both Balance Sheet and Income Statement Items (e.g., 3 to 5% of Net income or 2% of Total assets) Both Individual Items and Aggregate Level
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Quantitative amounts may be adjusted for qualitative factors High fraud risk Control Weaknesses First-year engagement Higher than normal risk of bankruptcy
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Unformatted text preview: Needing to attain important benchmarks (e.g., analysts estimates, loan covenant agreements, managements bonuses) A small materiality estimate will result in more evidence. A large materiality estimate will result in less evidence. How does the preliminary judgment about materiality affect the volume of audit evidence? Investigate mis-statements over $100. Investigate misstate-ments over $10,000. Relationship of Risk, Materiality, and Evidence Lower Materiality Threshold More Audit Work More External Evidence Increase Quantity Increase Quality Higher Risk Intentional Errors (I.e., Fraud) Considered material even if the dollar amount is not large (Increased risk of other material misstatements)...
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ugaud.ch3c - Needing to attain important benchmarks (e.g.,...

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