chapt 4 materiality

Question 1

what is definition of materiality?

Answer 1

A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of a reasonable user of the statements.

Question 2

what are the 3 levels of materiality and what do they mean in terms of what report you give

Answer 2

1. ammounts immaterial- standard unmodified opinion 2. material but dont overshadow the FSs as a whole- qualified opinion using except for 3. so material or pervasisve that overall fairness of statments in question- disclaimer or adverse opinion

Question 3

specific audit situations with decsiions that regard materiality involve judgement on auditors part. what are these and what report do they get?

Answer 3

1. materiality decisions NON GAAP condition- if fail to follow GAAP, can be unmodified, qualified, or adverse depending on materiality of departure 2. dollar amounts compared with a benchmark- whether amount material depends on company . so mus te compare with something like net income, current assets, etc 3. measurability- hard to measure lawsuit or acquisition to measure dollar amounts. so must evaluate the effect on statement users of failure to make disclosure 4. nature of the item- what kind of misstakement. illegality, psychological effect, possible consequences from contractual obligations…etc 5. materiality decisions- scope limitations conditions- depending on materiality of limitation of scope can be unmodified oinion report, report with qualified scope and opinion, or disclaimer.