Case 7.1 Anne Aylor

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Case 2

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A. 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. B. 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. C. 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. A high likelihood of management fraud makes it more likely that individual account misstatements will have the same directional effect on net income (i.e., asset accounts will be overstated and liability accounts will be understated). On the other hand, a low likelihood of management fraud makes it more likely that individual account misstatements will have an offsetting effect on net income e. The nature and cost of evidence available by account varies. Therefore, to minimize cost, auditors may want to assign a higher tolerable misstatement to accounts lacking competent evidence or costly to audit. The higher the tolerable misstatement for an account the less evidence needed. F. It is not likely that all account misstatements will have the same directional effect on net income. It is more likely that some account misstatements will overstate net income while other account misstatements will understate net income and thus will offset each other. G. Early planning helps the auditor perform the audit quickly and ensure that sufficient competent evidence is collected. As part of the planning process the auditor is required to prepare a written audit program (or set of audit programs) that establishes audit procedures to be performed during the...
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