...Concept of Materiality Materiality is the magnitude of an omission or misstatement of account information that makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement (PCAOB,11). To determine materiality, the preliminary judgment must first be made. To help plan the suitable date to collect, auditors must set a preliminary judgment. A preliminary judgment establishes the greatest amount which the auditor considers the account could be misstated and still not influence the financial statements or any third parties. The preliminary judgment can change at any given time. The auditor should estimate the combined misstatements. A comparison needs to be made between the combined estimates with preliminary judgments about materiality. A revision to the auditor’s previous judgment about materiality can then be made. Auditors determine materiality by looking at two major factors, quantitative and qualitative. Qualitative factors most likely will decrease materiality. Auditors must gather more evidence. Disguising changes in earnings and detecting fraud are examples of qualitative materiality. Numerous misstatements must be evaluated to determine if they are within the means of tolerability. The misstatement is tolerable if the account balance would be fairly stated if it is misstated by those amounts. Minor misstatements may become material if possible consequences arise...
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...Article Summary – The New Importance of Materiality (May 1, 2005) By: James Brady Vorhies Summary The following journal, The New Importance of Materiality, James Brady Vorhies explained implications and depth of materiality. The Sarbanes-Oxley Act of 2002 put “demands on management to detect and prevent material control weaknesses in a timely manner.” When a control does not meet the required minimum quality standard, it must be marked as an exception. Quantitative estimates have been used by accountants to aid them in identifying potential material transactions and events. Estimates of materiality are generally measured using the 5% rule, “which holds that a reasonable investor would not be influenced in their investment decisions by fluctuations [within the threshold] as it relates to net income or other income statement line items.” Materiality is a determination of what will versus what will not affect the decision of a knowledgeable investor given a specific set of circumstances related to fair presentation. Quantitative estimates are more often used over qualitative analyses due to the complexity. The Staff Accounting Bulletin no. 99 stated that “exclusive reliance on certain quantitative benchmarks to assess materiality in preparing financial statements and performing audits of the statements is inappropriate.” There are four perspectives of working materiality: 1. The financial statement misstatement or error 2. Internal control deficiency caused by failure...
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...Avon Week 01 Written Assignment Christine Bory Rasmussen College Author Note: This assignment is being submitted on January 12, 2014 for Steve Rudolph’s MAN4720 course at Rasmussen College by Christine Bory. Avon In this case, the new CEO Jung did a situation analysis to determine the strengths and weakness of the company and what could be done to improve sales. In the analysis it was determined they were weak in research and development of new products compared to their competitors. Also, that their target market was women 35 and older, when there was potential to earn more revenues if they increased the target market to a younger age group as well. A strategy formulation was formed on how they could improve and implemented. The company invested in a new state-of-the-art product research facility. This assisted in being more competitive in their business. They also redesign their sales brochures to be more visually appealing and increase distribution. They also developed a new line of cosmetics to appeal to women ages 16 to 24. Even though a plan was put in place and implemented to improve sales, once an analysis was done it, revenues were not as well as expected. So another plan was put in action which involved downsizing, doubling advertising spending and focusing on R&D resources. Strategic management is about adapting which in this case despite a good plan that was implemented it was still necessary to continue with strategic management by restructuring...
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... | | |BSA 320 Audit Materiality | Materiality Table [pic] In Case of Assets: (Excess over of Assets x Factor) + Planning Materiality In Case of Revenue: (Excess over of Revenue x Factor) + Planning Materiality Calculation of Materiality Level: Assets Base: [pic] Rate Apply: Closing Exchange Rate USD 1 = BDT 70 Comment: As per our duly course of audit we calculated audit materiality based on assets which comes to BDT 8,660,473 (May be rounded off to BDT 8,660,000) that equivalent to US Dollar $123,721. Basically it represents a quantitative Materiality which helps us to measure and evaluate the misstatement of financial statements. However decision about materiality ultimately remains a function of auditors’ professional judgment. Comment: Materiality is not allocated into financial statements account balance wise rather 75% is assumed as materiality level threshold and tolerable limit is also assumed as 2% of materiality level threshold. During the course of our audit according to given situation it may vary based on best judgment on specified matter. Revenue Base: [pic] Comment: As per our duly course of audit we calculated audit materiality based on assets which comes to BDT 4,218,366 that equivalent to US Dollar...
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...Assignment 7, Question 1 (a) Why are different materiality bases considered when determining planning materiality? It is because financial information is prepared by different people for different purposes, therefore not all elements of the financial statements are equally relevant to all users. As mentioned at Exhibit 1, a specific amount established for each financial statement element must be determined by considering the primary users as well as qualitative factors. For example, the creditors would be more concerned about the company’s ability to pay back debts, and the relevant information for them would be company’s cash flows, net income before income taxes, and income statement. (b) Why are different materiality thresholds relevant for different audit engagements? This is because each industry has different risk and the risk is also depends on a company’s financial history. So the materiality threshold is on auditor’s professional judgment rather than an absolute concept. (c) Why is the materiality base that results in the smallest threshold generally used for planning purposes? The materiality base that results in the smallest threshold generally used for planning purpose because an audit firm wants to assume the maximum amount of testing that could be necessary in a effort t make sure they allocate enough time and resources to perform the audit. And, the auditors want to provide reasonable assurance that the financial statements, taken as a whole...
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...Chapter 9 - Materiality and Risk Multiple Choice Questions From CPA Examinations 9-22 a. (4) b. (4) 9-23 a. (1) b. (1) c. (1) 9-24 a. (2) b. (3) c. (1) 9-25 a. The justification for a lower preliminary judgment about materiality for overstatements is directly related to legal liability and audit risk. Most auditors believe they have a greater legal and professional responsibility to discover overstatements of owners' equity than understatements because users are likely to be more critical of overstatements. That does not imply there is no responsibility for understatements. b. There are two reasons for permitting the sum of tolerable misstatements to exceed overall materiality. First, it is unlikely that all accounts will be misstated by the full amount of tolerable misstatement. Second, some accounts are likely to be overstated while others are likely to be understated, resulting in net misstatement that is likely to be less than overall materiality. c. This results because of the estimate of sampling error for each account. For example, the likely estimate of accounts receivable is an understatement of $7,500 + or - a sampling error of $11,500. You would be most concerned about understatement for accounts receivable because the estimated understatement of $19,000 exceeds the tolerable misstatement of $18,000 for that account. d. You would be most concerned about understatement amounts since the total estimated understatement amount ($30,000) exceeds the...
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...Chapter 9 - Materiality and Risk ← Multiple Choice Questions From CPA Examinations 9-22 a. (4) b. (4) 9-23 a. (1) b. (1) c. (1) 9-24 a. (2) b. (3) c. (1) 9-25 a. The justification for a lower preliminary judgment about materiality for overstatements is directly related to legal liability and audit risk. Most auditors believe they have a greater legal and professional responsibility to discover overstatements of owners' equity than understatements because users are likely to be more critical of overstatements. That does not imply there is no responsibility for understatements. b. There are two reasons for permitting the sum of tolerable misstatements to exceed overall materiality. First, it is unlikely that all accounts will be misstated by the full amount of tolerable misstatement. Second, some accounts are likely to be overstated while others are likely to be understated, resulting in net misstatement that is likely to be less than overall materiality. c. This results because of the estimate of sampling error for each account. For example, the likely estimate of accounts receivable is an understatement of $7,500 + or - a sampling error of $11,500. You would be most concerned about understatement for accounts receivable because the estimated understatement of $19,000 exceeds the tolerable misstatement of $18,000 for that account. d. You would be most concerned about understatement amounts since the total estimated understatement...
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... APOLLO SHOES CC: ARNOLD ANDERSON, DARLENE WARDLAW, BRADLEY CRUMPLER & KARINA RAMIREZ FROM: ADAM MARTINEZ of R.E.A.L Auditing DATE: October 20th, 2012 SUBJECT: MATERIALITY The definition of materiality can differ amongst independent auditors, however it remains one of the basic and major concepts of auditing. Research has actually shown that auditors do not have a consensus meaning of what is “material.” The way we will describe it will be as such: an amount or transaction that can influence the decision of users. Materiality is the maximum amount by which an auditor believes that a company’s financial statements can be misstated yet still not affect the decisions of reasonable users. Materiality is a professional judgment and not a calculation. Ultimately it is up to the auditor to determine whether the financial statements are materiality misstated. For the most part when identifying potentially material transactions, auditors have relied upon the 5 percent rule. This rule states that reasonable investors would not be influenced in their investment decision by a fluctuation in net income, gross profit, total revenues and total assets of 5% or less. Auditors also consider both quantitative and qualitative factors when trying to make a determination. The quantitative base for materiality is related to the 5 percent rule. Auditors also take into account several qualitative factors such as a misstatement that changes a loss to a net income, management turnover,...
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...In this paper Blokdijk et al. investigate the Planning Materiality (PM) values used by Dutch auditors performed by Big 5 and non-Big 5 firms between 1998 and 1999. They study whether there is a relationship between Planning Materiality, the client’s size, the client’s control environment, the client’s rate of return on assets and the client’s complexity. They also study whether Planning Materiality values differ between Big 5 and non-Big 5 firms. Given the vagueness of guidance for using certain quantitative thresholds and the importance of the materiality judgment, studying the auditor’s actual materiality judgment in practice can give us a different view on the audit decision making process and audit quality. Only two previous studies utilized archival data to calculate estimates of Planning Materiality. Both studies used data obtained from only one single audit firm, KPMG. In this paper, Blokdijk et al. estimate several PM-models on a data-set of 108 audits of companies of the Netherlands performed by 13 different public accounting firms during either 1998 or 1999. They find a good cross-sectional fit by applying a PM-model using the client’s size, client’s rate of return on assets, strength of control environment and the level of client complexity. First, they found that the ratio PM/Assets, systematically declines when the Assets increase. This is consistent with the findings of Elliot (1983) for KPMG audits. Then they went on to test if the PM and Assets has de facto...
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...- Assessing Materiality Purchase here http://chosecourses.com/cc-491-week-3-learning-team-assignment-assessing-materiality Description ACC 491 Week 3, Learning Team Assignment - Assessing Materiality and Risk Simulation ACC 491 Week 3, Learning Team Assignment - Assessing Materiality Purchase here http://chosecourses.com/cc-491-week-3-learning-team-assignment-assessing-materiality Description ACC 491 Week 3, Learning Team Assignment - Assessing Materiality and Risk Simulation ACC 491 Week 3, Learning Team Assignment - Assessing Materiality Purchase here http://chosecourses.com/cc-491-week-3-learning-team-assignment-assessing-materiality Description ACC 491 Week 3, Learning Team Assignment - Assessing Materiality and Risk Simulation ACC 491 Week 3, Learning Team Assignment - Assessing Materiality Purchase here http://chosecourses.com/cc-491-week-3-learning-team-assignment-assessing-materiality Description ACC 491 Week 3, Learning Team Assignment - Assessing Materiality and Risk Simulation ACC 491 Week 3, Learning Team Assignment - Assessing Materiality Purchase here http://chosecourses.com/cc-491-week-3-learning-team-assignment-assessing-materiality Description ACC 491 Week 3, Learning Team Assignment - Assessing Materiality and Risk Simulation ACC 491 Week 3, Learning Team Assignment - Assessing Materiality Purchase...
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...Einleitung Der Grundsatz der Wesentlichkeit existiert sowohl in der Buchhaltung als auch in der Wirtschaftsprüfung, wobei für den Abschlussprüfer beide Bereiche maßgeblich sind. Während die Festlegung einer Wesentlichkeitsgrenze für eine Abschlussprüfung selbstverständlich ist, muss sich der Prüfer auch Klarheit darüber verschaffen, wie diejenigen die den Abschluss erstellt haben, ihre Wesentlichkeitsgrenze festgelegt haben. In der Buchhaltung bilden maßgebliche und geringfügige Posten die Wesentlichkeitsgrenze, und anhand dieser Maßgeblichkeit wird auch determiniert welche Informationen separat oder zumindest als Fußnote im Jahresabschluss ausgewiesen werden. Errol Iselin und Takiah Iskandar, die Autoren des hier bearbeiteten Aufsatzes, waren der Meinung dass hier Diskrepanzen hinsichtlich der Wahrnehmung von Prüfern und dem tatsächlichen getrennten Ausweis von maßgeblichen Bilanzposten bestehen und Ziel der Arbeit war es, diese Annahme zu belegen. Bis dato gab es keine Forschungsarbeiten die sich mit der Existenz von Erfassungsschwellen und deren Auswirkung auseinandersetzten. Die Autoren konnten jedoch in Gesprächen mit den Partnern großer Prüfungskanzleien feststellen, dass auch die Praktiker der Meinung waren, dass solche Schwellen existierten, und dass diese geringer waren als die Grenzwerte zum getrennten Ausweis von wesentlichen Posten. Ein weiteres Ziel war es, ob und welchen Einfluss der Geschäftsbereich des Unternehmens auf die beiden Grenzen, die der Erfassung und des...
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... | | |b. insignificant. | | |c. significant. | | |d. relevant. | | | | |2. |The preliminary judgment about materiality is the amount by which the auditor believes the statements could be misstated and | | |still not affect the decisions of reasonable users. | | |a. minimum | | |b. maximum | | |c. mean average...
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...Answer [1]: [a] Why are different materiality bases considered when determining planning materiality? Different materiality bases are considered when determining planning materiality because different account and pieces of information are more relevant for different users. A bank may be concerned with the revenue and earnings of a company to determine if the lender will be able to fulfill the debt obligations without a problem. While a stockholder may be concerned with how much income they can make when investing in the company. The influence of the misstatements has different influences on different users of the financial statements. [b] Why are different materiality thresholds relevant for different audit engagements? Materiality is based on the auditors’ professional judgment. Meaning that materiality threshold will vary. The numbers will depend on things such as the situation of a company. The auditor decides what appropriate threshold is relevant in this audit engagement. The auditor needs to provide reasonable assurance that the company’s financial statements do not include any material misstatements, and the auditor should determine the decision of thresholds. [c] Why is the materiality base that results in the smallest threshold generally used for planning purposes? The material base that results in the smallest threshold is usually used for planning purposes, so the auditor will be able to detect the smallest misstatements possible. If the threshold...
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...Name First e.g., SHEIKH, Aamer): BRADY, Jack BBGP Case 7.1 Ann Aylor, Inc. Determination of Planning Materiality and Performance Materiality Be sure to delete any notes to yourself and to proofread and spell check this document before you turn it in. Print out the entire document (single-sided), staple it, and bring it to class to turn in at the beginning of class on Thursday, November 19. I pledge that, outside of class, I have worked on this case completely independently, and that, outside of class, I have given neither assistance or suggestions to anyone else nor received assistance or suggestions from anyone else in the process of completing this case. Pledge (handwritten signature in pencil):__________________________________ Date (handwritten in pencil):_____________________ Answer the following questions ONLY: Question [1]: Review Exhibits 1 and 2; audit memos G-3 and G-4; and audit schedules G-5, G-6 and G-7. Based on your review, answer each of the following questions: [a] Why are different materiality bases considered when determining planning materiality? [b] Why are different materiality thresholds relevant for different audit engagements? [c] Why is the materiality base that results in the smallest threshold generally used for planning purposes? [e] Why may the auditor use a different performance materiality amount or percentage of account balance for some financial statement accounts? Question [2]: Based...
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...a) Why are different materiality bases considered when determining planning materiality? Financial information is prepared for multiple users for different purposes and thus not all elements of the financial statements are equally relevant to all users. For example, stockholders will be more concerned with long-term revenue and profit growth than creditors and thus revenues and earnings will be more important to stockholder decisions than creditor decisions b) Why are different materiality thresholds relevant for different audit engagements? Materiality is a relative rather than an absolute concept. The materiality threshold that will influence users of the financial statements will vary depending on the context in which the entity operates. For example, the magnitude of a misstatement that will influence financial statement users will vary depending on how the entity is performing relative to the industry. Misstatements of a smaller magnitude will be more influential for an entity just achieving the industry average compared to an entity significantly over- or under-achieving relative to the industry average. c) Why is the materiality base that results in the smallest threshold generally used for planning purposes? The dual entry nature of accounting results in misstatements affecting at least two accounts. Most misstatements affect both a balance sheet and income statement account. Therefore auditors must design the audit to find the smallest misstatement that would...
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