Materiality

Planning Materiality (PM)

Depends on the client circumstances; estimated to be a $ amount.

start with a base number and then evaluate any qualitative factors that could potentially lower the amount.

Tolerable Misstatement (aka: Performance Materiality)

Account based and allocated; individual TM < PM

When setting TM, consider prior problems in accounts/disclosures

T/F: Segments combined can exceed PM at the parent level

F

T/F: PM & TM can be revised during the engagement

T:

Audit Risk isn’t revised

If PM and/or TM go down, auditor would have to update the audit plan/procedures

–Specifically, if either or both go down, additional or better-quality evidence would be needed (quantitative versus qualitative)

T/F: Qualitative factors can lower materiality

F: Never use qualitative factors to lower materiality; it will always be to raise it to a higher percentage.

T/F: A lower percentage for setting quantitative benchmark means it could be higher risk, newer client, etc.

T

SEC 99 talks about qualitative factors including:

–subjective vs. objective information

–Causes changes in trends

–Impacts the ability to meet/beat analyst forecasts

–Hides shifts from negative à positive earnings

–Relates to an important segment

–Is in agreement w/ laws & loan requirements

–Affects bonuses

–Etc.

T/F: Illegal acts must be reported to management and the AC

T

What are the considerations whether a misstatement violates the company’s obligation to keep accurate and reasonable records? 

–Significance (inconsequential items are different from significant items)

–Where did the issue come from (e.g., earnings management vs. the system’s normal ops)

–Cost (do not need to expand huge $$ if the issue is small; if cost is low, fix the problems)

–Authoritative clarity (if there is reasonable disagreement, adjustments may not be necessary; if things are clear, correction is likely needed)

AS 2105

•US Supreme Court discussion of “Reasonable Investor” and “Total mix of information” (PCAOB 2010, paragraph 2)

•Auditors are concerned with misstatements individually AND when combined

•Auditors should use the same factors to inform materiality judgments for ICFR and F/S audits