Question

1. Materiality
   1. In your own words, explain the concepts of planning materiality, tolerable misstatement, and clearly trivial amount.
   2. After describing these concepts, explain why these are important in the planning phase of the audit and what purpose they serve in the execution of the audit.

Answer 1

The concept of materiality is therefore fundamental to the audit. It is applied by auditors at the planning stage, and when performing the audit and evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial
statements. While materiality is first determined at the planning stage, auditors need to be mindful that circumstances may change during the audit or some of the audit findings may mean that the initial assessments have to be reassessed.

A tolerable misstatement is the amount by which a financial statement line item can differ from its true amount without impacting the fair presentation of the entire financial statements. The concept is used by auditors when designing audit procedures to examine the financial statements of a client. The procedures chosen should be able to locate all instances in excess of a tolerable misstatement.

explains that auditors 'may designate an amount below which misstatements of amounts in the individual statements would be and clearly trivial, would not need to be accumulated because the auditor expects that the accumulation of such amounts clearly would not have a material effect on the financial statements'.