lecture_05 4240

lecture_05 4240 - ACCT 4240: Auditing Materiality and Risk...

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ACCT 4240: Auditing Materiality and Risk
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Determine Planning Materiality Materiality : 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 (AU§312.06).
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Determine Planning Materiality Auditor must use judgment to estimate what level of precision is important to financial statement users. Estimate may be based on prior history and/or projected financial amounts. Typical “rules of thumb”: 5% of pretax income. ½% of revenues. ½% of total assets. 1% of total equity.
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Staff Accounting Bulletin 99 Rules of thumb should only be the start of determining materiality. SAB 99 points out that rules of thumb do not appear anywhere in the professional literature or in the law. SAB 99 suggests a number of issues that may cause a quantitatively small item to be material.
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An Item May Be Material if it: Arises from an item incapable of being measured precisely, or from an inherently imprecise estimate. Conceals a change in the trend in earnings. Hides a failure to meet analysts' expectations. Changes a loss into income, or vice versa.
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An Item May Be Material if it: Concerns a significant segment of the firm. Affects compliance with regulatory requirements. Affects compliance with debt covenants or other contractual requirements. Increases management compensation through bonus plan arrangements.
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An Item May Be Material if it: Involves concealment of unlawful activity. Exhibits price volatility in response to disclosure of an item. Appears to be an intentional misstatement. The qualitative and quantitative aspects of each misstatement should be considered separately and aggregated with other misstatements to determine whether the financial statements as a whole are misleading.
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Even small deliberate misstatements may violate Sections 13(b)(2)–(7) of the Securities Exchange Act of 1934. Failure to correct a known misstatement may be illegal, based on: the significance of the misstatement. how the misstatement arose.
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This note was uploaded on 03/08/2012 for the course ACCT 4240 taught by Professor Staff during the Spring '08 term at U. Memphis.

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lecture_05 4240 - ACCT 4240: Auditing Materiality and Risk...

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