MATERIALITY: IN PRACTICE
Response to the following:
Professional standards require auditors to make a preliminary judgment about materiality levels during the planning of an audit. Statement of Auditing Standards (SAS) No. 47 states that "the auditor plans the audit to obtain reasonable assurance of detecting misstatements that he/she believes could be large enough, individually or in the aggregate, to be quantitatively material to the financial statements."
SAS No. 47 indicates that materiality judgments involve both quantitative and qualitative considerations. This statement recognizes that it ordinarily is not practical to design procedures to detect misstatements that could be qualitatively material.
A number of rule-of-thumb materiality calculations have emerged, such as percentages of income, total assets, revenues, and equity. These rule-of-thumb calculations result in differing amounts for audit planning purposes. In fact, sizeable differences can result, depending on the rule of thumb and the industry.
Required:
a. It would seem prudent for auditors to give careful consideration to planning materiality decisions. Comment.
b. It is difficult to design procedures to detect misstatements that could be qualitatively material. Comment.
c. It is difficult to design procedures to detect misstatements that could be quantitatively material. Comment.
d. In your opinion, would the application of materiality be a frequent issue in court cases involving financial statements? Comment.
e. Comment on materiality implications of the Sarbanes-Oxley Act as it relates to control weaknesses.