• 1% to 3% of total assets. • 3% to 5% of shareholders’ equity. • 1% to 3% of revenue. • 1% to 3% of expenses or revenue (for non-profit entities). • The % chosen requires professional judgement.
Client Acceptance, Planning, and Materiality - 25 Impact of Qualitative Factors Misstatements that are important to users regardless of dollar amounts Auditors need to consider these factors to identify small misstatements that could affect users. Ex: Illegal payment could be small, but because illegal is qualitative material.
Client Acceptance, Planning, and Materiality - 26 Revising Overall Materiality • Materiality is set early in the planning stage. • Events may unfold after this that may change the original calculation, such as if they discontinue operations Actual result different from anticipated • CAS 320 provides examples of items that may cause the auditor to revise materiality. • Part of business is sold • Downturn in economy
Client Acceptance, Planning, and Materiality - 27 Performance Materiality • Remember that this is an amount less than overall materiality • Plan and conduct audit • Reduce likely uncorrected error exceeds materiality • Generally between 50% (high risk) and 75% (low risk) of overall materiality. • Involves considerable judegement • Performance materiality, not overall materiality affects sample sizes, look at larger samples allocated to specific accounts.
Client Acceptance, Planning, and Materiality - 28 Specific Performance Materiality • CAS 320 - specific performance materiality is materiality level determined for a • Class of transaction • Account balances • F/S disclosure • It must be equal to or less (usually less) than performance materiality. • Several qualitative can be taken into account in setting specific performance materiality
Client Acceptance, Planning, and Materiality - 29 Applying Materiality—Evaluating Results and Completing the Audit CAS 530, Audit sampling Tolerable misstatement is an application of performance materiality to a specific sampling procedure. CAS 450, Evaluation of Misstatements Identified During the Audit
Client Acceptance, Planning, and Materiality - 30 Accumulating Misstatements During the Audit CAS 450 explains that it may be useful for the auditor to categorize misstatements as follows: 1.factual misstatements – there is no doubt 2.judgmental misstatements – difference in management vs auditors 3.projected misstatements ( based on sample) Auditors would request management to 1.Correct factual misstatement 2.Discuss judgemental misstatements
Client Acceptance, Planning, and Materiality - 31 Forming an Overall Opinion and Reporting The auditor concludes on the overall reasonableness of the financial statements are not materially misstated If a misstatement is not corrected, it will affect the auditors report CAS 450 requires that the auditor communicate with those being in charge with governance and tell them about uncorrected misstatement and impact on audit reports.
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- Winter '10