1 to 3 of total assets 3 to 5 of shareholders equity

•
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.