Materiality and risk 9 EXPLAIN TO ME ONE MORE TIME THAT YOU DID A GOOD JOB. BUT THE COMPANY WENT BROKE @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 9 Materiality and Risk EXPLAIN TO ME ONE MORE TIME THAT YOU DID A GOOD JOB, BUT THE COMPANY WENT BROKE
USER FOCUS Materiality is defined in terms of financial statement users Therefore no hard and fast rules Need to consider multiple users and multiple bases Arens, Loebbecke: Aua @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. USER FOCUS Materiality is defined in terms of financial statement users Therefore no hard and fast rules Need to consider multiple users and multiple bases
Materiality Audits provide reasonable assurance that the financial statements are free of material misstatements @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. Audits provide reasonable assurance that the financial statements are free of material misstatements
FIGURE 9-1 Steps in Applying materiality Set Step preliminary Planning extent of tests judgment about materiality Estimate Step total misstatement Allocate In segment Step preliminary Perform Dement about materiality tests Estimate to segments Step the combined misstatement Evaluating results Compare combine BS line items or cycles Step estimate with preliminary or Mat- TE or TM revised judgment Arens, Loebbecke; Auditing, 8/E about materiality @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 9 - 1 Steps in Applying Materiality Estimate total misstatement in segment Step 3 Estimate the combined misstatement Step 4 Compare combined estimate with preliminary or revised judgment about materiality Step 5 Set preliminary judgment about materiality Step 1 Allocate preliminary judgment about materiality to segments Step 2 Planning extent of tests Evaluating results BS line items or cycles Mat – TE or TM Perform tests
SET PRELIMINARY JUDGMENT ABOUT MATERIALITY Factors Affecting Judgment Base X (function of client Percentage (function of audit risk ●●●●●●●●●0●● Preliminary estimate of materiality @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. SET PRELIMINARY JUDGMENT ABOUT MATERIALITY Base X (function of client) Percentage (function of audit risk) = Preliminary estimate of materiality Factors Affecting Judgment