Anne Aylor
| Week 6 Case Study | Case 7.1 | | Blake Ashmore | 8/16/2013 |
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1a. Materiality needs to be based differently when determining planning materiality because every business is different and every department in the financial statements need to be address in different ways. Also, certain departments can have a higher materiality rate as others; such as current assets or current liabilities. Net revenues and total assets is an area of the financial statements where materiality should not be greater than 2% materiality. Financial information is prepared for multiple users for many different reasons.
1b. Materiality is a relative rather than an absolute concept so it is always varying. Thresholds can be influential to many different users of the financial statements and they will vary depending on how the business compares to others in the same industry. Also, misstatement of $1,000 to a large company is not material whereas $1,000 to a smaller company could be considered material.
1c. The materiality base with the smallest threshold is generally used because it is important that the auditors find small misstatements that could ultimately influence users of the financial statements. Plus, if they find many small misstatements in the financial statements, they could add up to make a huge impact on the financial statements.
1d. Risk of management fraud is considered when determining tolerable misstatements because management fraud makes it more likely that individual account misstatements will have the same effect as they do on net income. On the other side of this though is that if there is a low likelihood of management fraud, it makes it more likely that the individual accounts will have an offsetting effect on net income.
1e. I think the biggest reason why auditors do not use the same tolerable misstatement amounts or percentages of account balances for all financial statement accounts is because not all statements have a huge effect on net
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1a. Materiality needs to be based differently when determining planning materiality because every business is different and every department in the financial statements need to be address in different ways. Also, certain departments can have a higher materiality rate as others; such as current assets or current liabilities. Net revenues and total assets is an area of the financial statements where materiality should not be greater than 2% materiality. Financial information is prepared for multiple users for many different reasons.
1b. Materiality is a relative rather than an absolute concept so it is always varying. Thresholds can be influential to many different users of the financial statements and they will vary depending on how the business compares to others in the same industry. Also, misstatement of $1,000 to a large company is not material whereas $1,000 to a smaller company could be considered material.
1c. The materiality base with the smallest threshold is generally used because it is important that the auditors find small misstatements that could ultimately influence users of the financial statements. Plus, if they find many small misstatements in the financial statements, they could add up to make a huge impact on the financial statements.
1d. Risk of management fraud is considered when determining tolerable misstatements because management fraud makes it more likely that individual account misstatements will have the same effect as they do on net income. On the other side of this though is that if there is a low likelihood of management fraud, it makes it more likely that the individual accounts will have an offsetting effect on net income.
1e. I think the biggest reason why auditors do not use the same tolerable misstatement amounts or percentages of account balances for all financial statement accounts is because not all statements have a huge effect on net