The auditor may need to determine separate materiality levels for which categories?
The FS as a whole
Performance materiality
Particular classes of transactions
Specific account balances
Specific disclosures
The determination of the materiality level must be based on...
The substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of info available on which to make a decision about the investment.
True / False: Setting the materiality level is based solely on the account balance.
False
Materiality is based not only on the quantity, but also the quality of the information.
True / False: When setting materiality for the FS as a whole, the auditor may use a quantitative range.
False
The auditor must set a specific monetary amount, at the smallest level of misstatement that could be material to any one of the financial statements.
When setting materiality for the FS as a whole, the auditor may use a percentage related to an appropriate FS benchmark. What considerations must be used to determine the benchmark?
Whether there are particular FS items on which users focus their attention
The nature of the entity and its industry -- and whether there are any recent changes to such
The entity's size, nature of ownership, and methods of financing -- and any recent changes
Materiality of certain items such as total revenue, gross profit, EBIT, or net assets.
What is performance materiality (nonissuer) or tolerable misstatement (issuer)
The maximum error in a population (vs the FS as a whole) that the auditor is willing to accept.
This reduces to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the FS exceeds materiality for the FS as a whole.
Which of the following utilizes a lower percentage to detemine materiality -- (1) Materiality for the FS as a whole, or (2) tolerable misstatement?
Tolerable misstatement is typically a subset of the materiality for the FS as a whole.
How does one determine materiality in group audits?
(1) Assess materiality, including performance materiality, for the FS as a whole
(2) Determine materiality for particular classes of transactions, acct balances, or disclosures of the group FS
(3) Determine component materiality (a particular segment of the group). This amount should be lower than the materiality for the group FS as a whole, and lower than the performance materiality for the group FS as a whole.
True / False: The materiality established at the start of the audit must be adhered to throughout the audit.
False
Materiality may be modified, especially if the original materiality was based on estimates, or there have been changes in laws, regulations, the financial reporting framework, or contractual agreements.
What does the acronym SOAP stand for?
Summary of Adjustments Passed
Which materiality would SOAP affect?
The performance materiality (tolerable misstatement) -- a lot of little adjustments that when put together in the aggregate can have a material impact
True / False: Materiality thresholds are established by either GAAP (for the FS) or GAAS (for the audit work).
False
Materiality is a professional judgment determined by the external auditor.
Tests of materiality should be performed on which 7 accounts?
Revenue
Expenditures
Inventory
Investments
PP&E
Payroll
Financing
Note to remember: when test questions use an interim financial statement, the amount presented must be adjusted in what manner?
They must be annualized.
Therefore, if using the first half of the year, multiple the amount x2. If using quarterly reports, multiply the amount x4y