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Apollo Shoes Case Study

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Words 430
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Apollo Shoes, Inc.
Materiality Memo
September 24, 2014

As stated previously we will be following the Generally Accepted Auditing Standards (GAAP) throughout this audit. One of the key components we will be following is the materiality concept.

a. As an independent auditor we will determine, by use of professional judgment, the materiality levels to be utilized for the use of this audit. These levels will help us determine what, if any, misstated information in the financial statements is considered material. Any material misstatements located in the financial statements will require an adjusting entry from the client or we will issue a modified opinion. Materiality can be a determining factor for users in making financial decisions, therefore, it is extremely important we provide reasonable assurance the financial statements are without error. However, we will state in our audit report there is some risk the financial statements will contain material misstatements, we cannot guarantee there are no errors.

b. …show more content…
When determining materiality, we, the auditors, must use professional judgment. There are no true guidelines in how to determine what is material, and what is not. However, there is a rule of thumb that auditors tend to use when calculating this figure. Depending on the type of company, one of the following would be used to determine the materiality amount: profit before tax, gross revenue, total contributions, total net assets, or total revenues.

Relevance and stability are two key components that need to be taken into consideration when deciding what amount to use for materiality calculations. Most auditing company tend to use profit before tax, total net assets, or total revenues. Continuing with the rule of thumb, it is understood 10% and higher is considered to be material, and anything below 5% is considered not

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