Auditing Homework Question 1

Which of the following statements are true about materiality?

A. Planning materiality is used to guide audit testing.

B. If audit risk is high, the audit should use a lower planning materiality.

C. Information is considered material if it affects the decisions of the users of the financial statements.

D. Materiality is a simple mathematical calculation.

E. There are different levels of materiality the auditor should consider.

F. A small dollar fraud is not material as it would not change a users decision.

G. The primary consideration in selecting a base should be the financial statement users needs.

Materiality is an important aspect of any audit. Which of the following statements are accurate? (Several choices may be correct.)

- Materiality is determined during the execution phase of the audit

- The higher the materiality the more work that is required

- Materiality is determined based on the level of audit risk

- The lower the materiality, the more work that is required

- Materiality is used to guide the planning of the audit

Atlantic Academy is a private school that offers education to children from Kindergarten to Grade 7. The school operates as a not-for-profit entity and oversight of the school is performed by the board ofdirectors. The board reviews the operational and financial results monthly to ensure the school is meeting its budget responsibilities. Revenues for the school generally come from three sources: student tuition,government funding, and various fundraising programs seeking additional funds for specific purposes.Government funding is provided based on the number of students enrolled, and the funds are to be spent only on the provision of education services. A requirement of the government funding is that the school must submit annual audited financial statements. Jones and Black, CPAs, are the auditors of Atlantic Academy. Their firm policy is to use the following percentages when determining materiality:

5% of normalized pre-tax profit		1% of total assets
2% of equity		2% of revenues or expenditures

Performance materiality is to be 65% of planning materiality. Select financial data for Atlantic Academy are provided below:

		2020		2019
Revenue		$1,186,000		$1,229,000
Expenses		1,607,000		1,160,000
Income from continuing operations		(421,000)		69,000
Total assets		3,419,000		2,928,000

- Jones and Black should use 5% of normalized pre-tax profit to establish materiality for Atlantic Academy.

- Qualitative considerations, including the needs of the users should be considered when determining materiality.

- The users of Atlantic Academys financial statements are concerned with the level of equity so using 2% of equity as a basis for establishing materiality is appropriate.

- Users of the financial statements include the government, the board of directors, and students.

- The most appropriate measure for materiality is 2% of expenditures as users are concerned with the entitys spending.

- Since the government is involved, materiality should be set at zero as every error must be discovered.