With Notes - Chapter 9 - Materiality

No allocation investments 00 inventory 00 total

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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% 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).
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+ Example – Proportional Approach Accounts Amount Allocation % Tolerable misstatement (TM) Cash $500,000 Audited 100% NO ALLOCATION A/R $2,000,000 2,000,000/9,000,000 =.22 .22*300,000 =$66,000 PPE $500,000 Audited 100% NO ALLOCATION Investments $3,000,000 3,000,000/9,000,000 =.33 .33*300,000 =$99,000 Inventory $4,000,000 4,000,000/9,000,000 =.45 .45*300,000 =$135,000 Total assets $10,000,000 $300,000 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%
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+ 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)
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+ Final Note on Materiality: Reminder n Calculating of PM is done on preliminary numbers [forecasted revenues/net income] n Wise to go back at the end of the audit and see how much materiality changes if we use final numbers.
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+ Next Up… n Case 4, Materiality n 2/21 n Audit Plan and Performing the Audit n Selected Readings for 2/26
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No allocation Investments 00 Inventory 00 Total

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