With Notes - Chapter 9 - Materiality

# Preliminary materiality 10000000 x 3 300000 step 2

• Notes
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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%
+ 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.
+ 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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• Spring '11
• Staff
• Financial audit, Preliminary materiality, qualitative factors

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