Explain how an auditor determines the materiality level that will be used in an audit. Define the concept of materiality and compare the term to pervasively material misstatements. Auditors set the materiality level for items that will be reviewed – in other words, items above a certain level will be reviewed.
In considering materiality for planning purposes, if an auditor believes that misstatement aggregating $10,000 would have a material effect on an entity’s income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet, then what would be the appropriate level to set in designing auditing procedures that would be expected to detect misstatements?
a. $10,000
b. $15,000
c. $20,000
d. $30,000