Chapter08LearningChecks - C HAPTER 8 M ATERIALITY D...

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Unformatted text preview: C HAPTER 8 M ATERIALITY D ECISIONS AND P ERFORMING A NALYTICAL P ROCEDURES Learning Check 8-1. a. Materiality is defined by the FASB as: The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. b. In applying this definition, the auditor is required to consider both (1) the circumstances pertaining to the entity and (2) the information needs of those who will rely on the audited financial statements. 8-2. In the planning phase of the audit, the auditor should assess materiality at the following two levels: The financial statement level because the auditor's opinion on fairness extends to the financial statements taken as a whole. The account balance level because the auditor verifies account balances in reaching an overall conclusion on the fairness of the financial statements. 8-3. Planning materiality is used in audit planning when the auditor makes a preliminary judgment about materiality levels. Planning materiality may differ from the materiality levels used in evaluating the audit findings because (1) surrounding circumstances may change and (2) additional information about the client will have been obtained during the audit. 8-4. a. Several levels of materiality may be defined for each of the financial statements. For example, for the income statement, materiality could be related to total revenues, operating income, income before taxes, or net income. For the balance sheet, materiality could be based on total assets, current assets, working capital, or stockholders' equity. b. For planning purposes, the auditor should use the smallest aggregate level of misstatements considered to be material to any one of the financial statements....
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Chapter08LearningChecks - C HAPTER 8 M ATERIALITY D...

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