Auditing and Assurance (KKP1-9)
Establishing materiality for the audit of a client’s financial statement requires considerable judgment. The allocation of the auditor’s preliminary judgment about materiality to the client’s accounts requires substantial judgment as well. For this reason, decisions about materiality are made by more experienced auditors. The following problem affords you an opportunity to apply the concept of materiality to an actual set of financial statements.
Imagine that you are employed as an auditor in a CPA firm that performs the audit of Microsoft. Your firm’s materiality guidelines indicate that overall engagement materiality should be set at an amount between five and ten percent of income before taxes.
a. Apply your firm’s guidelines to Microsoft’s 2003 financial statements. What percentage of income before taxes do you believe is appropriate? Why? What do you believe overall engagement materiality should have been for 2003?
b. Given Microsoft’s 2003 balance sheet, what asset line items would be allocated the highest amount of tolerable misstatement? Why?
1. Step in determining materiality in the implementation of the company:
– Determine the initial consideration of the materiality
– Allocate initial consideration of materiality to the segment
– Estimated total errors in the segment
– Estimate the combined error
– Compare the estimate with the combined initial consideration of the materiality
Selected materiality level of 5% -10%, because every company is different in determining the level of misstatement. An auditor should consider from the beginning. If the misstatement rate is less than the materiality level is considered reasonable profit company. Vice versa.
2. Asset trade receivables and inventory into assets with one item that can be tolerated food is very high. Misstatement that could be tolerated because the estimates of high and reap the audit require extensive testing.
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