A2 - M7 - Materiality

Question 1

What is the idea of materiality?

Answer 1

What is the amount that would change an investors decision? What would sway them from not investing?

They use this to determine the audit opinion.

Question 2

What does it mean when the auditor should use the smallest level of misstatement when considering materiality for the financial statements?

Answer 2

If the auditor determines that the income statement is 100,000 material and the balance sheet is 75,000 material. They should use the 75,000.

Question 3

How does an auditor calculate materiality?

Answer 3

They use a benchmark (revenue, net assets, profit, etc.) and use a percentage against that benchmark.

They can use whatever percentage or benchmark they want.

Question 4

Why do we need PM?

Answer 4

Potential for more misstatements to go unnoticed.

Possibility that the client may not correct the misstatements we asked them to adjust in prior years (PY AJE’s)

Question 5

How do you calculate PM?

Answer 5

Normally a percentage of materiality

Question 6

What is trivial?

Answer 6

Any amounts below this are not even considered to be tested.