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Materiality

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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 or if they affect a change in earnings. Quantitative is another major factor in regards to materiality. Quantitative is a not a set dollar amount but more of a reoccurrence factor. Any new numbers in calculations need to be observed each year.

Material misstatement is information presented in the financial statements. What is material for one company will not necessarily be material

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