Question

audit problem

Your preliminary judgment about materiality. apply with a company such as tjmaxx

(it would relate to the annual report, 10-k, and looking on the income statement)

Answer 1

SOLUTION

Materiality depends on the professional judgement of the auditor.

Material items are those which can influence the decision of users of Financial statement.It is to be considered both at the time of Planning & performing the audit.

Materiality May be fixed on 1)Individual Item Based 2) Overall financial Statement Based.

Steps to determine materiality is defind in following Steps.

1)Select an appropriate benchmark

2)Apply a percentage on the given benchmark

3)Resulting of Above aopplication provides performance materiality.

4)After that decide performance materiality that is lower than materiality

Following is the Income Statement of tjmaxx for Year ended 2017

Here we have considered Sales as our Benchmark.

Appropriate Percentage based om judgement is Assumed to be 2% i.e $35865*2%= $ 717.3

Any uncorrected mistatement exceeding this level need to be checked.

PERFORMANCE MATERIALITY

Planning the Audit soly to detect individual material misstatement overlooks the fact that aggregate of Individual material misstaements may cause the financial statements to be materially misstated therfore performance materiality is dedcided to lower the materiality level for every class of transanction ,account balance & disclosure to reduce the overall audit risk at acceptable low level.(Example -40% of Materiality i.e-$717.3*30%=$ 215.19)

Revision Of Materiality

if anything new comes to the knowledge of auditors which could led to change is decision of users of financial statements.

Then Auditor should lowet the materiality & cover more items in his checking

Auditor should also determine whether Performance Materiality is to be revised or not & whether Nature ,time & extent of audit procedures remains appropriate.