Total assets total revenues net assets three year

Info icon This preview shows pages 31–35. Sign up to view the full content.

View Full Document Right Arrow Icon
Total assets. Total revenues. Net assets. Three year average profit. The quantitative amounts may be adjusted lower for qualitative factors such as: Material misstatements in prior years. High risk of fraud. Potential loan covenant violations. Small amounts may cause the entity to miss forecasted earnings. Volatile business environment.
Image of page 31

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Step 2: Determine Performance Materiality Performance materiality is the amount or amounts set by the auditor at less than overall materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. The purpose of setting performance materiality is to establish a scope for the audit procedures for the individual account balance or disclosure. In practice auditors commonly set performance materiality for each account at between 50 and 75 per cent of overall materiality . The firms provide guidance in determining the appropriate percentage to use within the range . There are a number of reasons why total combined performance materiality greater than overall materiality makes sense from an audit planning perspective.
Image of page 32
Step 3: Evaluate Audit Findings When the audit evidence is gathered, the auditor: Aggregates misstatements from each account or class of transactions. Considers the effect of misstatements not adjusted in the prior period . Examines the cause of the misstatements and determines the impact of the material misstatements on the assessment of fraud and control risk. The auditor compares the aggregate misstatement to overall materiality. Performance materiality can be used for determining the fair presentation of the individual accounts. If the aggregated misstatements are greater than overall materiality , or if misstatements for individual accounts are in excess of performance materiality , the auditor would require the entity to adjust the financial statements or the auditor would have to issue a qualified or adverse opinion .
Image of page 33

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Estimated Total Misstatement and Preliminary Judgment Cash Accounts receivable Inventory Total estimated misstatement amount Preliminary judgment about materiality $ 4,000 20,000 36,000 $50,000 $ 2,000 12,000 31,500 $45,500 $ N/A 6,000 15,750 $16,800 $ 2,000 18,000 47,250 $62,300 Tolerable misstatement Direct projection Sampling error * Total Account Estimated misstatement amount *estimate for sampling error is 50%
Image of page 34
JMS July 2006 ACC 3531 audit fundamentals Estimated Total Misstatement and Preliminary Judgment Net misstatements in the sample $3,500 ÷ $50,000 × $450,000 = $31,500 Total recorded population value × Total sampled ÷ Direct projection estimate of misstatement =
Image of page 35
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

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