Question

Your preliminary judement of materiality was based on net income. Why is it necessary to compare unadjusted misstatements to other bases of materiality? What should the auditor do if the unadjusted misstatements exceed one or more materiality threshold?

Answer 1

1. First we should understand what is mean by materiality ?

Any item in the financial statement is said to be material if it is influences the mind of the reader of those financial statements.

example-

A large company has a building in the hurricane zone during Hurricane Sandy. The company building is destroyed and after a lengthy battle with the insurance company, the company reports an extra ordinary loss of $10,000. The company has net income of $10,000,000. The materiality concept states that this loss is immaterial because the average financial statement user would not be concerned with something that is only .1% of net income.

2.

Misstatements are estimated as sum all unadjusted errors found; locating an error, isolating it, further more sampling and finally asking the client to fix it.

For materiality we need base, thus correct statements are needed for the base. The auditor must evaluate whether unadjusted misstatements are material, individually or in combination with other misstatements.

While making the evaluation, the auditors need to evaluate the misstatements in regard to the specific accounts and disclosures involved and to the financial statements as a whole, considering into account relevant qualitative and quantitative factors. The maximum amount of misstatement has to be decided that would be considered material for a specified account balance. Such misstatements are not accumulated by an auditor and thus do not form part of the uncorrected misstatements.

note-

Although even if the management corrects the misstatements, the auditor must perform additional procedures to determine if the unadjusted misstatements remain.

3. If the unadjusted misstatements exceed one or more materiality threshold, the auditor may determine if the materiality base is appropriate.

If it is appropriate, auditors may wish to gain more audit evidence to determine the nature and extent of the misstatements, or to propose further adjustments.

and after gaining appropriate and sufficient evidence auditor shall REPORT the same to the respected authority.