Question

Auditing - Chapter Seven

This assignment consists of one question with two parts listed below. Answer the questions and submit to the drop box on the assigned date. Your paper should be double-spaced and at minimum two pages long. You may use any format for the answer, however, when appropriate, the Conclusion, Rule, Application, Conclusion format is preferable for clarity and better understanding.

Question

Importance of materiality judgments

Explain how auditors determine planning materiality and performance materiality. What happens if performance materiality is set too high or, alternatively, too low.

Answer 1

Importance of materiality = In order to express an opinion on financial statements, auditor is required to obtain reasonable assurance about whether financial statements as a whole are free from material misstatement resulting from errors, ommissions or fraud.

Thus, it becomes a fundamental thing to make judgement about materiality and in the light of that materiality an auditor determine whether financial statements as a whole presents true and fair view. Thus, it is very important to make judgements regarding materiality.

Determination of planning materiality :-

Planning materiality is the maximum amount of misstatement whether as a result of error or fraud which an auditor estimates at planning level to be tolerable and will not affect decision. Of reasonable users of financial statements. It is calculated by first of all selecting a base having major bearing on financial statements like assets or revenue which is then multiplied by a percentage factor to determine allowable misstatements. Further percentage factor is multiplied by planning materiality to determine tolerable misstatements in a financial statements.

Determination of performance materiality :-

Performance materiality is the amount set by the auditor at less than materiality for financial statements as a whole to reduce risk to an appropriate low level that the uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. It is generally calculated by applying a certain percentage as the auditor seems fit toaia chosen benchmark which may be assets or revenue which is likely to have influence on the decision of the users of financial statements.

It should be noted that if performance materiality is set too high it will mean that more amount of misstatement will be tolerable and in such a case auditor may not perform sufficient auditing procedure which are required in order to detect material misstatements and this may result in inappropriate auditing opinion

If performance materiality is set too low than it means that tolerable amount of misstatement is very low and to keep it low auditor will perform more and more auditing procedures than required which unnecessarily increase burden of work and ultimately may lead to slippage of target.