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Audit materiality

Below are five questions that all need to be based on the United States.

1. Why might planning materiality differ from the materiality level used in evaluating audit findings?

2. What official quantitative guidelines exist for financial statement materiality? Identify one of the quantitative guidelines commonly used in practice.

3. Explain how auditors evaluate the materiality of misstatements found in the process of collecting audit evidence.

4. What are analytical procedures? Identify one use of analytical procedures in an audit engagement. Which one(s) are required for all audits?

5. How can analytic procedures assist the auditor in audit planning?

Solution Preview

The response addresses the queries posted in 835 words with references.

// Auditor materiality judgments are important elements in the audit and financial statements disclosure decisions. Due to absence of a formal guidance by the auditing standards, it becomes a difficult task. But, it is crucial for a successful audit. Here, first of all, we will discuss the concept of planning materiality then various quantitative approaches used for its evaluation followed by its use in evaluation of misstatements.//

Difference between planning materiality and materiality levels

Materiality in auditing is a concept related to the importance of financial information in economic decisions of its users i.e. the influence of the information on investors, creditors, managers, regulators and other users, if it is misstated or omitted. Materiality level or tolerable misstatements is determined by quantifying it by various methods like sensitivity analysis, KPMG's "gauge" formula, sliding scale method, percentage of pre-tax income etc. and then averaging them all. According to 'ISA 320 Audit Materiality', planning materiality refers to assessing the materiality level from both qualitative and quantitative aspects, by the auditors according to their judgment during planning phase of the audit. It is required for risk assessment and control (Puttick & Esch, 2007).

Quantitative guidelines for financial statement materiality

No specific quantitative guidelines are issued by Financial Accounting Standards Board (FASB) for determining materiality. Several common approaches are ...

Solution Summary

The response addresses the queries posted in 835 words with references.

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