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Chapter 8 Modern Auditing

This chapter discusses materiality decisions and performing analytical procedures. It covers determining materiality for planning purposes and at different account levels. Materiality judgments consider both quantitative and qualitative factors. The chapter also discusses allocating financial statement materiality to accounts, how materiality affects audit evidence, developing expectations for analytical procedures, and investigating unexpected differences identified.

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310 views14 pages

Chapter 8 Modern Auditing

This chapter discusses materiality decisions and performing analytical procedures. It covers determining materiality for planning purposes and at different account levels. Materiality judgments consider both quantitative and qualitative factors. The chapter also discusses allocating financial statement materiality to accounts, how materiality affects audit evidence, developing expectations for analytical procedures, and investigating unexpected differences identified.

Uploaded by

daftaran daftar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Modern Auditing:

Assurance Services and the Integrity


of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 8 – Materiality Decisions and Performing


Analytical Procedures
Chapter 8 Overview
Concept of Materiality
• Auditor Considerations
– Circumstances pertaining to the entity
– Information needs of those relying on
financial statements

• Purposes for Preliminary Judgments


– Scope decisions
– Evaluation of known misstatements
Preliminary Judgments About
Materiality
• Planning Materiality
– Circumstances change
– Additional information identified

• Judgments at Two Levels


– Financial Statement Level
– Account Balance Level
Materiality at the Financial
Statement Level
• Quantitative Guidelines
– No official guidelines within auditing
standards
– 5-10% of Net Income before Taxes
– ½-1% of Total Assets

• Qualitative Considerations
– Quantitatively immaterial, qualitatively
material
– Illegal act by entity
Materiality – Quantitative Example
Materiality at the Account
Balance Level
• Account Balance Materiality

• Tolerable Misstatement

• Material Account Balance


Allocating Financial Statement
Materiality to Accounts
• When financial statement materiality is
quantified

• Must allocate to individual accounts

• Balance Sheet and Income Statement


accounts

• Two Considerations
– Material misstatement amount of account
– Probable cost of verification
Materiality and Audit Evidence

• Sufficiency of Evidence
– Inverse relationship
– Lower amount of tolerable
misstatement needs more evidence to
obtain reasonable assurance

• Evaluation of Evidence
– Reevaluate preliminary materiality
– Quantitative and Qualitative
considerations
Performing Analytical Procedures
Identify Calculations and
Comparisons to be Made
• Absolute Data Comparisons

• Common-size Financial Statements

• Ratio Analysis

• Trend Analysis

• Compare Financial Information with


Nonfinancial Information
Effectiveness of Analytical
Procedures
Develop an Expectation Range

• Comparable Prior Periods

• Formal Budgets and Forecasts

• Relationships of Financial Statement


Elements

• Industry Data
Performing Analytical Procedures

• Perform the Calculations

• Analyze Data and Identify Significant


Differences

• Investigate Significant Unexpected


Differences

• Determine Effects on Audit Planning

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