Determining Materiality And Assessing Risks

Different materiality bases are considered when determining planning materiality because the magnitude and nature of financial statement misstatements or omissions have different influences on different financial statement users. For example, investors are more interested in the accuracy of numbers involving net income because they are mainly concerned with the company’s ability to increase shareholder wealth. For an audit company, the primary concern when planning materiality is to take into account all expected financial statement users. These different expected users all have different

Auditors are not expected to uncover all misstatements, but to detect material ones. Whether an item is material or not will depend on the materiality levels set during the planning stage.

The auditor must remember that all information collected during the audit needs to be sufficient enough to further the audit process. The information must not only possess the two qualities, relevance and reliability, but it should also test various assertions. For instance, in the audit of Walmart, the auditor should make an attempt to acquire information such as financial statements from the company’s bank, as opposed to acquiring the statements from Walmart’s management. Taking such crucial information from Walmart’s management will put the reliability of that information into question. It is possible that management may manipulate the financial statements, so that they are more appealing to the public and investors. Management may do things

documentation, materiality and risk, internal control, statistical tools, and the overall audit plan and program.

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

al, 2012, p. 214). Therefore, a material misstatement may not be detected during the audit. In addition, the audit may not detect errors under the materiality level, whether resulting from error, fraud, or misappropriation of assets. Anderson, Olds, and Watershed may decline to express an opinion or issue a report if the firm is unable to complete the audit for any reason.

The audit team focused on preforming groundwork analytical procedures. A comparison of the performance of Smackey’s Dog Foods Inc to other similar industries was used to validate the original assessment of the risks. Performing the procedures helped detect areas that pose a high risk of the material misstatements. Another important part of the planning of the audit was to set a balance of materiality that is appropriate. The situations that

The auditor should consider planning materiality. When a financial statement account exceeds the planning materiality, that account should be considered significant for both the audit of internal control over financial reporting and the financial statement audit. The more the account exceeds planning materiality, the greater it should be considered significant.

Statement of Financial Accounting Concepts No. 2, “Qualitative Characteristics of Accounting Information,” defines materiality as follows:

(a) No, we don’t agree with the junior auditor. Auditors should consider the risk of fraud in the company and the inherent risk in the financial statement when deciding overall materiality. Tolerable misstatement should be determined as 50-75 percent of overall materiality in order to reduce the possibility that the total of uncorrected and undetected misstatements would result in material misstatement. According to AU Sec. 312A-11, “as a result of the interaction of quantitative and qualitative considerations in materiality judgments, misstatements of relatively small amounts that come to the auditor's attention could have a material effect on the financial statements.” An adjustment of 20 million of grower payables should have been considered material since this single misstatement accounts for 1.63% of the total asset, which was intolerable. In addition, this adjustment could have increased cost of goods sold by 20 million and reduced net income to six million from 26 million. From the perspective of net income, the adjustment was indeed material.

d. “The auditor's reliance on substantive tests to achieve an audit objective related to a particular assertion may be derived from tests of details, from analytical procedures, or from a combination of both. The decision about which procedure or procedures to use to achieve a particular audit objective is based on the auditor's judgment on the expected effectiveness and efficiency of the available procedures. For significant risks of material misstatement, it is unlikely that audit evidence obtained from substantive analytical procedures alone will be sufficient (PCAOB, AS 2305.09).”

. Relevancy is a basic necessitation for enabling evidence that tends to support or disprove a

Thirdly, Molex’s managers decided not to raise the accounting issue with the auditors because they believed the error was immaterial. The management team did not fully understand GAAP’s definition for materiality; the managers probably thought the adjustment amount was immaterial relative to the $2 billion total revenues. According to GAAP definition for materiality, "information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.”

Step 1: Determine a materiality level for the overall financial statements. The auditor should establish a materiality level for the financial statements taken as a whole. This will be referred to as planning materiality. Planning materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users. Materiality, however, is a relative, not an absolute, concept.

Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements