You are the audit manager on the current year audit of Black & White Inc. (B&W). The audit staff's field work for the B&W was completed on February 26, 2020. You are reviewing the working paper files on February 28, 2020. You notice an interesting comment on a payroll audit working paper prepared by the junior, Paige, a co-op student who has since returned to university for her accounting studies. In testing a sample of 50 payroll transactions, Paige found that one payroll cheque for $2,500 was paid to a person who was not listed as an employee in the company's personnel files. Following up on this payment, Paige enquired of the assistant controller and noted her reply as follows: "The assistant controller explained that there were many possible reasons the person would not be listed in the personnel files, but since the payment is only $2,500 and our audit materiality is $100,000, it is not significant to the audit and would be inefficient to investigate the payment further." You remember Paige saying something during the audit that she had a funny feeling about the assistant controller and the payroll.

Required:

a) What is materiality? Please define. 

b) Discuss the role of materiality in the above situation. Include in your response whether or not the $2,500 discussed above is material to the audit of B&W. 

c) As the audit manager in this situation, what action would you take after reviewingthe working paper files? 

Answer rating: 100% (QA)

a Materiality refers to the concept used in auditing to determine the significance or importance of an item transaction or discrepancy in financial statements It is the threshold at which errors omiss... View the full answer