Auditors make materiality judgments during the planning phase of the audit in order to be sure they ultimately gather suffi- cient evidence during the audit to provide reasonable assurance that the financial statements are free of material misstatements. The lower the materiality threshold that an auditor has for an account balance, the more the evidence that the auditor must collect. Audi- tors often use quantitative benchmarks such as 1% of total assets or 5% of net income to determine whether misstatements materially affect the financial statements, but ultimately it is an auditor's indi- vidual professional judgment as to whether a given misstatement is or is not considered material.
a. What is the relationship between the level of riskiness of the client and the level of misstatement in an account balance that an auditor would consider material? For example, assume that Cli- ent A has weaker controls over accounts receivable compared to Client B (therefore, Client A is riskier than Client B). Assume that Client B is similar in size to Client A and that the auditor has concluded that a misstatement exceeding $5,000 would be material for Client B's accounts receivable account. Should the materiality threshold for Client A be the same as, more than, or less than that for Client B? Further, which client will require more audit evidence to be collected, Client A or Client B?
b. How might an auditor's individual characteristics affect his or her professional judgments about materiality?
c. Assume that one auditor is more professionally skeptical than another auditor, and that they are making the materiality judg- ment in part (a) of this problem. Compare the possible alterna- tive monetary thresholds that a more versus less skeptical auditor might make for Client A.