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    Vasilije Nikacevic
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    The document discusses materiality considerations for audit planning. It provides explanations for why: 1) different materiality bases are considered depending on the relevance to financial statement users; 2) materiality thresholds vary across audit engagements depending on user context; and 3) the smallest materiality threshold is generally used for planning to ensure all misstatements are detected. It also discusses how the risk of management fraud and differing account sensitivities factor into determining tolerable misstatement amounts. Finally, it notes that individual account tolerable misstatements may exceed overall planning materiality, and that trial balances may be projected, to simplify planning and set audit procedures and expectations for year-end amounts.

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    The document discusses materiality considerations for audit planning. It provides explanations for why: 1) different materiality bases are considered depending on the relevance to financial statement users; 2) materiality thresholds vary across audit engagements depending on user context; and 3) the smallest materiality threshold is generally used for planning to ensure all misstatements are detected. It also discusses how the risk of management fraud and differing account sensitivities factor into determining tolerable misstatement amounts. Finally, it notes that individual account tolerable misstatements may exceed overall planning materiality, and that trial balances may be projected, to simplify planning and set audit procedures and expectations for year-end amounts.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    546 views3 pages

    Audit Case Study Materiality

    Uploaded by

    Vasilije Nikacevic
    The document discusses materiality considerations for audit planning. It provides explanations for why: 1) different materiality bases are considered depending on the relevance to financial statement users; 2) materiality thresholds vary across audit engagements depending on user context; and 3) the smallest materiality threshold is generally used for planning to ensure all misstatements are detected. It also discusses how the risk of management fraud and differing account sensitivities factor into determining tolerable misstatement amounts. Finally, it notes that individual account tolerable misstatements may exceed overall planning materiality, and that trial balances may be projected, to simplify planning and set audit procedures and expectations for year-end amounts.

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    © All Rights Reserved
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    of 3

    Zakaria Eddamoh

    Zineb lyoussi
    Mourad seghieri
    Amine dou

    Anne Aylor, Inc. Case 7.1


    1)
    A. Why are different materiality bases considered when determining planning

    materiality?

    The reason why different materiality bases are considered when determining

    planning materiality is because not all the aspects and sections of a financial statement

    represent the same importance or relevance to users in different situations.

    B. Why are different materiality thresholds relevant for different audit

    engagements?

    Since the contexts differ from one user to another then the materiality

    thresholds will vary depending on the situation the user faced with.

    C. Why is the materiality base that results in the smallest threshold generally

    used for planning purposes?

    Because if the smallest misstatement on a financial statement cannot be

    detected then no one can assure that the financial statement is free of errors and

    financial misstatements. Auditors should find the smallest misstatement that

    influences a user of the financial statement.

    D. Why is the risk of management fraud considered when determining tolerable

    misstatement?
    two scenarios:

    - 1st scenario: High possibility of management fraud = more likelihood that

    effects on income will happen following individual account misstatements.

    - 2nd scenario: Low possibility of management fraud= offsetting effect on net

    income along with individual account misstatement.

    E. Why does the auditor not use the same tolerable misstatement amount or

    percentage of account balance for all financial statement accounts?

    By adding the rate of tolerable inaccuracy in a financial report the auditors

    want to minimize the costs. The following Relationships summarizes the situation:

    - High tolerable misstatement = low evidence needed

    - Low tolerable misstatement = High evidence needed

    F. Why does the combined total of individual account tolerable misstatements

    commonly exceed the estimate of planning materiality?

    Not all the misstatements on financial accounts will affect the net income in the

    same way since some misstatements might overstate the net income while in the

    opposite some financial misstatements will understate net income and consequently

    they will offset the effects of each other’s.

    G. Why might certain trial balance amounts be projected when considering

    planning materiality?

    For the following reasons:


    - Auditor’s life might be simplified by the fact of making an early planning since

    they will be able to collect sufficient competent evidence.

    - Planning sets audit procedures to be made during the audit engagement.

    - Auditors must have expectations of the ending year amounts so that they can

    establish materiality thresholds for the whole year.

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