Audit I-Materiality and Risk-Class version1

Audit I-Materiality and Risk-Class version1 - Risk...

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3-1 Risk Assessment and Materiality In a GAAS Audit
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3-2 Risk and Materiality What is the final product of the auditor’s work? What is the deliverable? The Audit Report
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3-3 Materiality The magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. The magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. Materiality is not an absolute and it is not a black or white issue! The determination of materiality requires professional judgment. 312.04 LO# 11
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Who Are the Users or the Reasonable Persons? Not Just Anyone Who Might Pick Up a Financial Statement 312.06
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3-5 Materiality The quantitative base for materiality is a percentage (typically 3 to 5 percent) of: Total assets. Total revenues. Income before taxes. Income from continuing operations. Gross profit Three-year average of income before taxes. See 312.28 The quantitative base for materiality is a percentage (typically 3 to 5 percent) of: Total assets. Total revenues. Income before taxes. Income from continuing operations. Gross profit Three-year average of income before taxes. See 312.28 The quantitative amounts may be adjusted lower for qualitative factors such as: First-year engagement Control weaknesses Management turnover High market pressures High fraud risk Higher than normal risk of bankruptcy Also See 312.59-.60 The quantitative amounts may be adjusted lower for qualitative factors such as: First-year engagement Control weaknesses Management turnover High market pressures High fraud risk Higher than normal risk of bankruptcy Also See 312.59-.60 LO# 11
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3-6 Steps in Applying Materiality on an Audit Step 1: Determine a materiality level for the overall financial statements (planning materiality 312.27-.30) Step 1: Determine a materiality level for the overall financial statements (planning materiality 312.27-.30) Step 2: Determine tolerable misstatement (allocation of materiality at individual account/class of transactions level) (312.34-.36) Step 2: Determine tolerable misstatement (allocation of materiality at individual account/class of transactions level) (312.34-.36) Step 3: Evaluate auditing findings near the end of the audit (312.50-.66 and 312.38-.41) Step 3: Evaluate auditing findings near the end of the audit (312.50-.66 and 312.38-.41) LO# 12
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3-7 In determining materiality for audit purposes, the auditor should consider financial statement users to be 1 2 3 4 25% 1. Only trained financial analyst 2.
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This note was uploaded on 02/21/2012 for the course ACCT 420 taught by Professor A during the Fall '11 term at Samford.

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Audit I-Materiality and Risk-Class version1 - Risk...

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