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Materiality (Auditing)

In: Business and Management

Submitted By jangesp
Words 508
Pages 3
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, are not materially misstated for any users.

(d) Why is the risk of management fraud considered when determining performance materiality?

The risk of management fraud considered when determining performance materiality because auditors assume that there is a chance that management may intentionally misstate the financial statements, and there is a chance that it is a materiality...

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