L3 Notes_Part_7 - Materiality (this page not from the...

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Materiality (this page not from the AICPA) What do you consider in allocating materiality to the accounts? 1. The likelihood of misstatement in the account 2. The likelihood of overstatement v. understatement 3. The cost of auditing the account Judgment subject to 2 constraints 1. Allocate to any account should not exceed 60% of the preliminary estimate 2. The sum of the tolerable misstatements typically exceeds the preliminary estimate. Why impose these constraints? What is the effect on sample size?
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Materiality of Major Balance Sheet Accounts (audited separately)… Cash Marketable Securities Accts. Rec. Notes Rec. Inventory Etc. Overall Materiality Total Assets Financial Statements taken as a whole = Amount of Overall Materiality to be Allocated e.g., Overall Materiality x 2 Main Point: Allocate more materiality when: -Estimation Risk is high or evidence (audit procedures) is costly - Never allocate more than an account’s materiality (Users’ needs come Tolerable Misstatements (or Allocated Materiality)
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This note was uploaded on 10/05/2011 for the course ACG 5637 taught by Professor Monikacaushoulli during the Fall '08 term at University of Florida.

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L3 Notes_Part_7 - Materiality (this page not from the...

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