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What is materiality? Is materiality measured the same wayacross different authoritative bodies? What factors would you useon an audit to determine materiality? Can you give an example whentwo auditors do not agree on an issue that may or not be materialand how would you as a third auditor resolve it?

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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Materiality:

1) What is materiality and why is difficult to apply the concept?

2) As an auditor, how do you identify who the primary users of the entity’s financial statements are, and the information those users need to find in the financial statements?

3) What factors should be considered in deciding whether information is material or not?

4) How is the presentation (e.g. aggregation/ disaggregation) of information influenced by materiality and vice versa?

5) During the course of an audit, both quantitative as well as qualitative misstatements need to be considered. Give four examples of qualitative misstatements.

Panzero Bread is a major retailer of specialty sandwich itemsand baked goods. The following information represents the com-pany’s financial position as of 12/31/14 and 12/31/13. 12/31/14(unaudited) 12/31/13 (audited) Total assets $698,752,000$542,609,000 Accounts receivable $25,152,000 $19,041,000 Totalsales $1,066,691,000 $828,971,000 Cost of goods sold $842,255,000$628,534,000 Net income $57,456,000 $58,849,000 Earnings per share$1.81 $1.88 The auditor of Panzero Bread identifies the company asa client with high audit risk and has set the posting thresholdsfor individ- ual accounts at 10% of overall financial statementmateriality levels. The auditors have detected an overstatement ofaccounts receivable of $345,000. The misstatement is not a surpriseto the auditors, as they have detected misstatements in thisaccount in the past. On a per share basis, the misstatementrepresents $0.01 of earnings per share. The auditor believes thatthe misstatement should be corrected. Management argues stronglythat they prefer not to make the correction because they do notbelieve it is mate- rial; that is, the misstatement represents justover 1% of the account balance. Although left unsaid, the auditorknows that management is under considerable pressure from WallStreet to meet analyst expectations for earnings per share.Reducing earnings per share by even $0.01 would cause the trend inearnings to become even more negative than the unaudited financialnumbers already reveal, and it would cause the company to just missanalyst forecasts for earnings per share. a. Use the three commonbenchmarks for making materiality judgments (net income, totalassets, and net sales) to establish materiality for the financialstatements overall. b. What difficulties does the auditor face whenthe alternative benchmarks yield differing conclusions aboutmateriality? What qualitative factors should the auditor considerin making its materiality judgment in that case? c. Articulate areason for choosing one particular benchmark among the threecalculated in part (a), and use that benchmark to calculate theposting (clearly trivial) threshold for the accounts receivableaccount. d. What effect will the qualitative factors in this casehave on the auditor’s posting (clearly trivial) threshold for theaccounts receivable account?

Qustion :

. For the past five years, Clark CPAs has audited the financialstatements of a manufacturing company. During this period, theaudit scope was limited by the client as to the observation of theannual physical inventory. Because Clark CPAs considers theinventories to be material and was not able to satisfy the auditrequirements by using other auditing procedures, the firm wasunable to express an unmodified opinion on the financial statementsin each of the five years.
The CPA was allowed to observe physical inventories for the currentyear ended December 31, 2015, because the client’s bank would nolonger accept the audit reports. However, to minimize audit fees,the client requested that the CPA not extend audit procedures tothe inventory as of the beginning of the year, January 1, 2015.Which type of audit report would you suggest be issued this yearand why?


Note:

I have the answer, could you please paraphrase it ?

The answer is:

The scope of the audit has been restricted by inability toassess the inventory. Based on the information,this appears to behighly material or material, depending upon the auditor'spreliminary judgment about materiality. Because the auditor wasunable to obtain sufficient appropriate evidence on the beginninginventories, it would be necessary to issue either a qualified ordisclaimer of opinion on the income statement and statement of cashflows as well as the beginning of the balance sheet. The choice ofa qualified or disclaimer opinion would depend upon materiality. Ifhighly material, then a disclaimer is the best choice. If material,then a qualified scope and opinion might be more appropriate. Anunqualified opinion could be issued for the current period balancesheet.

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