Question

3. What benchmark would you use to calculate materiality? Why? ((a)Net Income, (b) Assets, (c) Revenue, or (d)Equity.) (Pick 1 letter & Explain why)

a. 5 percent to 10 percent of net income before taxes.

b. ½ percent to 1 percent of total assets.

c. ½ percent to 1 percent of total revenues.

d. ½-1 percent of total equity.

4. Would you use a higher percentage or a lower percentage for the benchmark you selected in Q3 above. (EX: 5% of Net Income vs 10% of Net Income)? Explain why?

5. Using the choices from Q3 & Q4 above calculate “overall materiality” for your audit for 2019? (ex: Benchmark %(1%) * Assets ($25m)= $250K (Overall Materiality)).

Answer 1

3) What benchmark would you use to calculate materiality? Why? ((a)Net Income, (b) Assets, (c) Revenue, or (d)Equity.)

a)Net income - 5 percent to 10 percent of net income before taxes

Net income is the important factor in calculating the materiality factor, because with the materiality factor we can able to easily assess the income and expenditure and the losses of the benchmark indices. The threshold level in benchmark is more important as we can able to know the value of the product only by the benchmark. Each company has its own benchmark and the threshold for the benchmark. Determining the threshold level of materiality requires appropriate base level and percentage be decided on,  Net income or earnings, revenue, total assets and total debt/equity as benchmarks.

4) I will select higher percentage on the benchmark, where it gives you the higher movement of the benchmark for the particular stock. 10% of net income will give the appropriate value of the holdings also it will enable us to catch up on the exact net income of the benchmark.

5) Overall materiality - Benchmark (10%) * Assets ($25m) = $2500K overall materiality