Question

Which of the following statements is false?

a. Quantitative materiality is based on a specific numeric cutoff, like 5% of net income or 1% of total assets.

b. Performance materiality is the materiality amount that the auditor uses in in determining whether the financial statements overall are materially correct.

c. An auditor should use the result of the calculation as a starting point for planning materiality and then adjust as necessary for qualitative characteristics of the particular audit client.

d. Posting materiality is the materiality amount that signifies the misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements overall are materially correct.

Answer 1

Option B is incorrect.

Because, Perfomance materility refers the amount set by the auditor at less than materilaity for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregte off uncorrected and undetected mistatement exceeds materiality forthe financial statement as a whole.

Due to the use of materiality in an audit, there is always a risk that there a number of smaller, immaterial errors or omissions that have not been identified by the auditor. Individually, these are not a problem as each error or omission is not believed to be important to the users of the financial statements.

However, auditors should be concerned about a number of small errors or omissions that, when aggregated, add up to a material problem. If this is the case, there exists a material misstatement in the financial statements that has not been identified and reported on by the auditor resulting in an incorrect audit opinion. To help reduce this risk, the auditor gives overall materiality. That is, the overall figure is reduced by a certain amount, for example 50-25%, and this newly calculated performance materiality is used when performing audit procedures.

Performance materiality is dependent on factors such as the risk within the entity being audited, the control environment of the entity, and the expectation of misstatements.