With Notes - Chapter 9 - Materiality

On the scale revenues fall above 300 billion n 826

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On the scale revenues fall above $300 Billion n $82.6 Million (Base) n $17.6 Million (Excess Factor) n Total Preliminary Materiality = $100.2 Million
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+ Planning Materiality: Allocation of Preliminary Materiality n Tolerable Misstatement n An estimate of the maximum monetary misstatement that may exist in an account balance without causing the financial statements to be materially misstated. n Allocation of Preliminary Materiality n Allocating the overall materiality to account balances to give us tolerable misstatement levels for accounts. n Points about Tolerable Misstatement: n Allocated only to accounts not audited 100% n Allocated to both balance sheet and income statement
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+ Planning Materiality: Allocation of Preliminary Materiality n Words of Caution n Subjectivity can lead to bias. n Auditors ignore/waive known misstatements. n Individually immaterial misstatements may add up to material misstatements (in one period or over time). n Tables oversimplify. n Clients aware of materiality.
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+ Allocation of Preliminary Materiality n Two Main Approaches: n Rule of Thumb n Common and Easy to Use n Less Conservative Usually n Using Proportional Allocation n More Accurate n More Conservative n More Complex n Does Not Account for Qualitative Factors
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+ Allocation of Preliminary Materiality: Rule of Thumb n Allocate 50% to 75% of preliminary materiality to each account. n Account’s tolerable misstatement (TM) could add up to 3 to 4 times the preliminary materiality. n Why? n Not all accounts will be misstated by their TM. n Simultaneous audit of accounts. n TM as percentage of PM is usually a very small amount for large accounts. n PM is a safety net. n Achieve smaller TM during testing.
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+ Example – Rule of Thumb Approach Accounts Amount Allocation % Tolerable misstatement (TM) Cash $500,000 Audited 100% No allocation A/R $2,000,000 50% 150,000 PPE $500,000 Audited 100% No allocation Investments $3,000,000 60% 180,000 Inventory $4,000,000 75% 225,000 Total assets $10,000,000 555,000 Step 1 – Determine Preliminary Materiality Base – Total assets = 10,000,000 Percentage (0-5%) = 3%
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