Excerpts from a court case appear below. The lawyer is in the process of examining his client,

Question:

Excerpts from a court case appear below. The lawyer is in the process of examining his client, a public accountant, accused of negligence in the conduct of an audit.

Lawyer: Were you aware that the statements were being used by the creditor who was owed $100,000 that was secured by inventory?

Auditor: Yes, he was one of several users.

Lawyer: How did your audit strategy take into account the needs of this creditor?

Auditor: We assessed the engagement as being slightly riskier than usual.

Lawyer: And how did you determine materiality to be $250,000?

Auditor: We used principles in accordance with generally accepted auditing standards, namely:

• 5 percent to 10 percent of income before income taxes of $6 million, being $300,000 to $600,000

• 0.5 percent to 1 percent of total assets of $50 million, being $250,000 to $500,000 Because of the riskiness of this engagement, we adopted a conservative approach and took a lower materiality level than we would otherwise have chosen.

Required In accordance with generally accepted auditing standards:

a. List the factors that you would consider in this situation. How would materiality affect the extent of audit testing? List any other matters that would be relevant.

b. Discuss the relationship between materiality and audit risk. Were these concepts appropriately considered in the situation described above?

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