Chapter 9 - Materiality

Percentage 0 5 3 preliminary materiality 10000000 x 3

This preview shows page 18 - 22 out of 22 pages.

Percentage (0-5%) = 3% Preliminary materiality = 10,000,000 x 3% = $300,000 Step 2 – Allocate – How Do We Decide On a % Use size of the account as a guide. Larger accounts, larger %. *check $555,000 < $900,000 (3 times PM).
Image of page 18

Subscribe to view the full document.

+ Example – Proportional Approach Accounts Amount Allocation % Tolerable misstatement (TM) Cash $500,000 Audited 100% NO ALLOCATION A/R $2,000,000 PPE $500,000 Audited 100% NO ALLOCATION Investments $3,000,000 Inventory $4,000,000 Total assets $10,000,000 Step 1 – Determine Preliminary Materiality Base – Total assets = 10,000,000 Percentage (0-5%) = 3% Preliminary materiality = 10,000,000 x 3% = $300,000 Step 2 – Allocate Based on percent of each account/total sum of accounts not audited 100%
Image of page 19
+ Evaluative Materiality n What do we do with materiality during the second and third steps of the audit process – performing of the audit. n Steps: n Perform procedures and gather evidence n Identify misstatements n Are they material individually n Compare the misstatement found during testing to TM n Are they material in total n When added together do they exceed PM n Must consider both qualitative and quantitative aspects n Resolve with client (during negotiation process)
Image of page 20

Subscribe to view the full document.

+ Final Note on Materiality: Reminder
Image of page 21
+ Next Up… n Case 4, Materiality n 2/21 n Audit Plan and Performing the Audit n Selected Readings for 2/26
Image of page 22
  • Spring '08
  • YARDLEY
  • Financial audit, Preliminary materiality

{[ snackBarMessage ]}

Get FREE access by uploading your study materials

Upload your study materials now and get free access to over 25 million documents.

Upload now for FREE access Or pay now for instant access
Christopher Reinemann
"Before using Course Hero my grade was at 78%. By the end of the semester my grade was at 90%. I could not have done it without all the class material I found."
— Christopher R., University of Rhode Island '15, Course Hero Intern

Ask a question for free

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern