01 Jul Determining Materiality
What is considered material by you may not be material from your fellow auditors’ perspective. You will explore how to determine what materiality levels are so that your audit team is in agreement.
Throughout an audit, for all purposes, the material amount is defined as $500,000.
Do you think that one materiality amount can be set for an entire company?
If so, is $500,000 too high or too low?
If you disagree, what would be your suggestion for determining materiality? Explain your reasoning.
Just do response each posted # 1 to 3 down below only.
It is funny that this topic comes up now as I am in an audit review with EY right now where I work. After the meetings I had yesterday I can say that a material amount cannot be set for an entire company. Yesterday I was reviewing three different processes that involved outstanding client funds through different life insurance products. Each product had a different threshold for the amount that was considered material and needed to researched. Without giving to much information products that were more time sensitive or involved more clients had a lower threshold. I don’t think you can say 500,000 is to high or too low of a threshold because at an individual level 500,000 is way to high but for the size of our company 500,000 materiality threshold is acceptable for overall loan amounts. My suggestion to this company is to create materiality amounts for each part of the business that is acceptable and feasible. That way important small things don’t get missed and time is not wasted researching items that don’t need to be. The accounting journal suggests the 5% rule and I know it is used in some cases were I work.
VORHIES, J. (2005, May 01). The New Importance of Materiality. Retrieved May 29, 2019, from https://www.journalofaccountancy.com/issues/2005/may/thenewimportanceofmateriality.html
Materiality is important to financial users like investors and creditors. The omission or misstatement of financial information could influence the decisions of investors and creditors. Therefore, the auditor is required to record and report all misstatements identified during the audit process. In order to do so, the auditor needs to determine the client company’s materiality. The materiality concept is to estimate the errors, mistakes, and frauds, etc. that might have happened in the financial and accounting information (Whittington & Pany, 2016, p. 204). At the planning stage, the auditor decides the appropriate dimensions to detect material misstatements. The higher the materiality levels, the lower the audit procedure’s scope. In other words, setting the larger amount for errors, frauds, and misstatement the less effort in finding evidence the auditor needs to make.
In general, the materiality threshold is based on the percentage of specific items on financial statements such as assets, revenues, equity, or net income before taxes, etc. There is no standard set in the number of dollars for materiality, and it depends on the size and nature of the business. To determine materiality, the auditor needs to decide which items to use for the calculation. It is important to select similar items to be consistency over the years. Once the base is set, the auditor applies a percent to compute the materiality. This determined percentage is based on the relevant quantitative or qualitative factors in relation to specific accounts (Whittington & Pany, 2016, p. 206). The rule-of-thumb here is to ensure the results would meet the reasonable assurance and protect the audit risk.
Whittington, O. R., & Pany, K. (2016). Principles of Auditing & Other Assurance Services (20thed.). New York, NY: McGraw-Hill Education.
I do not believe that one materiality amount can be set for an entire company. Materiality is important for mostly internal users, such as investors and creditors. The concept of this, from what I understand, is that there is a certain threshold of material that can or cannot be met by a company – and is unmeasurable.
It ultimately depends if $500k is too high or low. In terms of a business, $500k makes sense. However, $500k for an individual to possess is high.
I feel that companies need to set specific amounts when considering material. That way there will be less room for any potential discrepancies to take place.
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