Auditors make materiality judgments during the planning/risk assessment phase of the audit to be sure they ultimatelygather sufficient evidence during the audit to provide reasonableassurance that the financial statements are free of material misstatements.The lower the materiality threshold that an auditorhas for an account balance, the more the evidence that the auditormust collect. Auditors often use quantitative benchmarks such as 1% of total assets or 5% of net income to determine whethermisstatements materially affect the financial statements, but ultimatelyit is an auditor’s individual professional judgment as towhether a given misstatement is or is not considered material.a. What is the relationship between the level of riskiness of theclient and the level of misstatement in an account balancethat an auditor would consider material? For example,assume that Client A has weaker controls over accountsreceivable compared to Client B (therefore, Client A is riskierthan Client B). Assume that Client B is similar in size to ClientA and that the auditor has concluded that a misstatementexceeding $5,000 would be material for Client B’s accountsreceivable account. Should the materiality threshold for ClientA be the same as, more than, or less than that for ClientB? Further, which client will require more audit evidence tobe collected, Client A or Client B?b. How might an auditor’s individual characteristics affect hisor her professional judgments about materiality?c. Assume that one auditor is more professionally skeptical thananother auditor and that they are making the materialityjudgment in part (a) of this problem. Compare the possiblealternative monetary thresholds that a more versus less skepticalauditor might make for Client A.
Auditors make materiality judgments during the planning/
risk assessment phase of the audit to be sure they ultimately
gather sufficient evidence during the audit to provide reasonable
assurance that the financial statements are free of material misstatements.
The lower the materiality threshold that an auditor
has for an account balance, the more the evidence that the auditor
must collect. Auditors often use quantitative benchmarks such as 1% of total assets or 5% of net income to determine whether
misstatements materially affect the financial statements, but ultimately
it is an auditor’s individual professional judgment as to
whether a given misstatement is or is not considered material.
a. What is the relationship between the level of riskiness of the
client and the level of misstatement in an account balance
that an auditor would consider material? For example,
assume that Client A has weaker controls over
receivable
than Client B). Assume that Client B is similar in size to Client
A and that the auditor has concluded that a misstatement
exceeding $5,000 would be material for Client B’s accounts
receivable account. Should the materiality threshold for Client
A be the same as, more than, or less than that for Client
B? Further, which client will require more audit evidence to
be collected, Client A or Client B?
b. How might an auditor’s individual characteristics affect his
or her professional judgments about materiality?
c. Assume that one auditor is more professionally skeptical than
another auditor and that they are making the materiality
judgment in part (a) of this problem. Compare the possible
alternative monetary thresholds that a more versus less skeptical
auditor might make for Client A.
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