As it is our first-year auditing a company and starting the audit we need to determine a few things: Required: 5) What would be a good basis to set materiality (Revenue, Assets, Equity, etc.)? (Think about the definition of materiality, and what would be important to shareholders- do they care about profitability or how many assets the company has acquired.) (Think about if the company is a non-profit, a start-up, oriented towards building up assets, profitable, etc. Use these factors in your explanation.) (Pick 1 letter and \& explain why.) [EX: B. Net Income because........] a. Revenue b. Net Income c. Total Assets d. Total Equity 6) What percentage (higher percentage or a lower percentage) would you use for the benchmark you selected in Q5 above? (Pick an actual percentage ex: 5% or 1%, or 10%, based on the guidance below.) (EX: 5% of Net Income vs 10% of Net Income)? Explain why? Your choice should be based on the Inherent risk and control risk determined in questions 1-4 above. [Click on one of the boxes below to select your answer, check only one box.] a. 5 percent of net income before taxes. b. 10 percent of net income before taxes. c. 1/2 percent of total assets. d. 1 percent of total assets. e. 1/ percent of total revenues. f. 1 percent of total revenues. g. 1 percent of total equity. h. Less than 1 percent of total Equity 7) What does picking a larger or smaller \% for materiality mean to our detection risk? (Example if you picked 10% or 5% does that mean Detection risk is high or low.) (See slides for guidance on how to answer this question.) [Click on one of the boxes below to select your answer, check only one box.] a. Picked a Larger \% for materiality, this means Detection Risk is higher. b. Picked a Smaller \% for materiality, this means Detection Risk is lower. 8) Using the financial statements and the answers to the questions above calculate materiality for your audit of the company. (Calculate Overall materiality, Tolerable Misstatement (use 75\% of overall Materiality), and De minimis Materiality (use 10% of Tolerable Misstatement). (Show your calculation and the number you calculated.) - EX: Benchmark 96(1%) Assets ($25m)=$250K (Overall Materiality) - EX:-Tolerable Misstatement =50% Overall Materiality [$250K50%=$125k] - EX: De minimis Materiality =5% of Tolerable Misstatement ($125K.05=$6,250). a. Overall Materiality = b. Tolerable Misstatement= c. De minimis Materiality= 9) Compare the Overall Materiality number you calculated and compare it to both the income statement and Balances Sheet of your company- does the number appear reasonable (not too low or too high). (EX: Overall Materiality is $1M but Total Revenue is $950K, this materiality would probably be too high in relation to the Income Statement, or if the materiality was $1,000 but revenue is $5M this materiality appears to be too low for testing purposes.) [This situation happens when the balance sheet numbers or Income Stmt Numbers are significantly higher that the other statement.]
