Materiality and Risk

Materiality and Risk - 3-1Risk Assessment and Materiality...

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Unformatted text preview: 3-1Risk Assessment and Materiality In a GAAS Audit AU 312 and 314.01-.39 &.102 - .1243-2MaterialityThe magnitudeof 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 magnitudeof 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.312.04LO# 11Who Are the Users or the Reasonable Persons? Not Just Anyone Who Might Pick Up a Financial Statement312.063-4MaterialityThe quantitative base formateriality is a percentage(typically 3 to 5 percent) of:•Total assets.•Total revenues.•Income before taxes.•Income from continuingoperations.•Gross profit•Three-year average of income before taxes.See 312.28The quantitativebase formateriality is a percentage(typically 3 to 5 percent) of:•Total assets.•Total revenues.•Income before taxes.•Income from continuingoperations.•Gross profit•Three-year average of income before taxes.See 312.28The quantitative amountsmay be adjusted lower forqualitative factors such as:•First-year engagement.•Control weaknesses.•Management turnover.•High market pressures.•High fraud risk.•Higher than normal riskof bankruptcy....
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Materiality and Risk - 3-1Risk Assessment and Materiality...

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