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Chapter 8 OverviewChapter 8 Overview

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Concept of MaterialityConcept of Materiality

Auditor Considerations

Circumstances pertaining to the entity

Information needs of those relying onfinancial statements

Purposes for Preliminary Judgments

Scope decisions

Evaluation of known misstatements

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Preliminary Judgments AboutPreliminary Judgments AboutMaterialityMateriality

Planning Materiality

Circumstances change

Additional information identified

Judgments at Two Levels

Financial Statement LevelAccount Balance Level

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Materiality at the FinancialMateriality at the FinancialStatement LevelStatement Level

Quantitative GuidelinesNo official guidelines within auditingstandards

5-10% of Net Income before Taxes-1% of Total Assets

Qualitative ConsiderationsQuantitatively immaterial, qualitativelymaterial

Illegal act by entity

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Materiality Quantitative ExampleMateriality Quantitative Example

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Materiality at the AccountMateriality at the AccountBalance LevelBalance Level

Account Balance Materiality

Tolerable Misstatement

Material Account Balance

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Allocating Financial StatementAllocating Financial StatementMateriality to AccountsMateriality to Accounts

When financial statement materiality isquantified

Must allocate to individual accounts

Balance Sheet and Income Statementaccounts

Two ConsiderationsMaterial misstatement amount of account

Probable cost of verification

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Materiality and Audit EvidenceMateriality and Audit Evidence

Sufficiency of EvidenceInverse relationship

Lower amount of tolerable

misstatement needs more evidence toobtain reasonable assurance

Evaluation of EvidenceReevaluate preliminary materiality

Quantitative and Qualitativeconsiderations

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Study BreakStudy Break

1. In making preliminary judgments aboutmateriality, the auditor should assessmateriality at ______ levels.

A.OneB.Two

C.Three

D.Four

B. Two

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Study BreakStudy Break

2. Any amount of misstatement thatis less than the level of materialitywould be referred to as:

A.Quantitative misstatementB.Material misstatement

C.Tolerable misstatement

D.Probable misstatement

C. Tolerable misstatement

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Study BreakStudy Break

3. Materiality and audit evidence aresaid to have a(n) _______relationship.

A.InverseB.Converse

C.Obtuse

D.Correlating

A. Inverse

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Performing Analytical ProceduresPerforming Analytical Procedures

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Identify Calculations andIdentify Calculations andComparisons to be MadeComparisons to be Made

Absolute Data Comparisons

Common-size Financial Statements

Ratio Analysis

Trend Analysis

Compare Financial Information with

Nonfinancial Information

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Effectiveness of AnalyticalEffectiveness of AnalyticalProceduresProcedures

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Develop an Expectation RangeDevelop an Expectation Range

Comparable Prior Periods

Formal Budgets and Forecasts

Relationships of Financial Statement

Elements

Industry Data

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Performing Analytical ProceduresPerforming Analytical Procedures

Perform the Calculations

Analyze Data and Identify SignificantDifferences

Investigate Significant Unexpected

Differences

Determine Effects on Audit Planning

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Study BreakStudy Break

4. This technique, often referred to as avertical analysis, involves calculating thepercentage of a related total and then

comparing to expected amounts.A.Ratio Analysis

B.Trend Analysis

C.Absolute Data ComparisonsD.Common-size Financial Statements

D. Common-size Financial Statements

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Study BreakStudy Break

5. In developing an expectationrange, an auditor should use all ofthe following, except:

A.Comparable prior periodsB.Formal budgets and forecasts

C.Industry data

D.All of the above should be used

D. All of the above should be used