Planning Materiality and Tolerable Misstatement

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Audit Manual Excerpt: Materiality Guidelines--
Planning Materiality and Tolerable Misstatement

Planning Materiality
This section provides general guidelines for determining planning materiality and tolerable misstatement for audits performed by Willis & Adams. The application of these guidelines requires professional judgment and the facts and circumstances of each individual engagement must be considered.

Statement of Financial Accounting Concepts No. 2, “Qualitative Characteristics of Accounting Information,” defines materiality as follows:

Materiality is the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable
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Mutual Fund Entity ▪ Net Asset Value – combined misstatements or omissions less than .5 percent of Net Asset Value are presumed to be immaterial and combined misstatements or omissions greater than 1 percent are presumed to be material.

Balance Sheet Materiality” – Even if the planning materiality is based on the income statement, a balance sheet-based calculation is useful for evaluating the materiality of misclassifications between balance sheet accounts. For current assets and current liabilities, the balance-sheet materiality guidelines are 3 to 8 percent. For total assets, the guidelines are 1 to 3 percent.

The specific value within the above ranges for a particular base is determined by considering the primary users as well as qualitative factors. For example, if the client is close to violating the minimum current ratio requirement for a loan agreement, a smaller planning materiality amount should be used for current assets and liabilities. Conversely, if the client is substantially above the minimum current ratio requirement for a loan agreement, it would be reasonable to use a higher planning materiality amount for current assets and current liabilities.

Planning materiality should be based on the smallest amount established from relevant materiality bases to provide reasonable assurance that the financial statements, taken as a whole, are not materially misstated for any user.

Tolerable Misstatement
In addition to establishing planning materiality

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