jzanzig_Auditing Ch 9 Lecture

jzanzig_Auditing Ch 9 Lecture - Chapter 9 Materiality and...

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9 - 1 Chapter 9 Materiality and Risk Audit Risk CPA
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9 - 2 Presentation Outline I. Steps in Applying Materiality II. Risk in Auditing III. Planning Model Relationships IV. Evaluating Results
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9 - 3
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9 - 4 Step 1 in Applying Materiality Set preliminary judgment about materiality. The preliminary judgment about materiality is the maximum amount the auditor believes the statements could be misstated and still not affect the decisions of reasonable users. Decided early in audit. Permissible misstatements are often less for smaller clients. Although the FASB and AICPA are unwilling to provide specific materiality guidelines to practitioners, bases are needed for evaluating materiality. See Figure 9-2 on page 235. Qualitative factors can affect materiality. See factors on pages 234-235.
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9 - 5 Step 2 in Applying Materiality Allocate preliminary judgment about materiality to segments. An allocation is necessary because evidence is accumulated by segments rather than the financial statements taken as a whole. The allocation to account balances is known as the tolerable misstatement. Most practitioners allocate materiality to balance sheet rather than income statement accounts. This is because most income statement misstatements have an equal effect on the balance sheet because of the double-entry bookkeeping system. The sum of the tolerable misstatement is allowed to exceed overall materiality because (1) it is unlikely that all accounts will be misstated by the full amount of tolerable misstatement, and (2) some accounts are overstated while others are understated, resulting in a net amount that is likely to be less than overall materiality.
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9 - 6 Illustration of Tolerable Misstatement Allocation for Current Assets Tolerable Account Misstatement Cash $ 4,000 Accounts receivable 20,000 Inventory 36,000 Preliminary judgment about materiality $50,000
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9 - 7 Step 3 in Applying Materiality Estimate total misstatement in segment. One way to calculate the estimate of misstatement is to make a direct projection from the sample to the population. $3,500 net misstatement of the inventory sample $3,500 ÷ $50,000 × $450,000 = $31,500 $50,000 total inventory sampled $450,000 total recorded population value for inventory $31,500 direct projection estimate of misstatement × ÷ =
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9 - 8 Illustration of Estimating Total Misstatement in Segment Tolerable Direct Sampling Account Misstatement Projection Error Total Cash $ 4,000 $ 0 $ N/A $ 0 Accounts receivable 20,000 12,000 6,000 * 18,000 Inventory 36,000 31,500 15,750 * 47,250 Preliminary judgment about materiality $50,000 * estimate for sampling error is 50%
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9 - 9 Tolerable Direct Sampling Account Misstatement Projection Error Total Cash $ 4,000 $ 0 $ N/A $ 0 Accounts receivable 20,000 12,000 6,000 * 18,000 Inventory 36,000 31,500 15,750 * 47,250 Total estimated
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This note was uploaded on 10/07/2011 for the course ACCOUNTING 4220 taught by Professor Brown during the Spring '11 term at UMBC.

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jzanzig_Auditing Ch 9 Lecture - Chapter 9 Materiality and...

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