Review Exhibits 1 and 2; audit memos G 3, and G 4; and audit schedules G 5,
G 6-1, and G 6-2. Based on your review, answer each of the following questions: [a]
Why are different materiality bases considered when determining planning materiality? Financial information is prepared for multiple users for different purposes and thus not all elements of the financial statements are equally relevant to all users. For example, stockholders will be more concerned with long-term revenue and profit growth than creditors and thus revenues and earnings will be more important to stockholder decisions than creditor decisions. [b] Whyaredifferentmaterialitythresholdsrelevantfordifferentauditengagements? Materiality is a relative rather than an absolute concept. The materiality threshold that will influence users of the financial statements will vary depending on the context in which the entity operates. For example, the magnitude of a misstatement that will influence financial statement users will vary depending on how the entity is performing relative to the industry. Misstatements of a smaller magnitude will be more influential for an entity just achieving the industry average compared to an entity significantly over- or under-achieving relative to the industry average. [c]
Why is the materiality base that results in the smallest threshold generally used for planning purposes? The dual entry nature of accounting results in misstatements affecting at least two accounts. Most misstatements affect both a balance sheet and income statement account. Therefore auditors must design the audit to find the smallest misstatement that would influence users of the financial statements. Reasonable assurance that the financial statements are free of material misstatements cannot be provided unless the audit is designed to detect the smallest misstatement that would influence users. [d] Why is the risk of management fraud considered when determining tolerable misstatement? A high...
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