To: Don Hutton From: Leslie Nguyen K2-3: Kingston Company Preliminary Materiality Assessment a) Describe auditor’s concept of materiality? Information is material and should be disclosed if it is likely to influence the economic decision of financial statement users.
Accounting numbers are not perfectly accurate because of the nature of accounting. • Estimates are used and honest mistake happen. b) Some relationship and considerations used by auditors when assessing the dollar amount consider material.An accounting estimate is an example of applying materiality to auditing accounting numbers that involve a high degree of management judgement. Small misstatements may be material in some case. Auditors cannot rely only on qualitative aspects of materiality.
Intentional misstatements intentional violations of the law or intentional earnings management are now considered material. Auditors are generally left without definite, quantitative guidelines to determine materiality 5% of income from continuing operating % of net income before bonus 1/2% to 1% of net asset value for the mutual fund industry 1/2% to 2% of revenue or expense for non-for profit entities 1/2% of revenue for the real estate industry Auditor can select some other basis for materiality using professional judgement: Absolute size Relative size Nature of the itemParticular circumstances surrounding the client Auditors must consider the sum of known or potential misstatements Auditors need to add other fraud-relate considerations in determining materiality ) Determine an amount you consider to be a minimum material misstatement. Justifying your decision. |Measurement base |Factors applied |Possible materiality | |Normalized after tax income |5-10% | | |Assets |? 1% | | |Equity |? -5% | | |Revenue |? -1% | | |Gross profit |? 5% | | |Revenue/expense |? -2% | | The current asset-liability position of the company in financial difficulty seeking to renew its bank . The bank loans of current year $750,000 with 11% interest Net income of the company is important since it’s growing from 180,000 to 294,000 Revenue is increasing and expense is decreasing