Question
In order to assure that financial statements are free from material misstatements, auditors make materiality judgments during the planning phase of the audit. They ultimately
In order to assure that financial statements are free from material misstatements, auditors make materiality judgments during the planning phase of the audit. They ultimately gather sufficient evidence to be certain of this assurance. The lower the materiality threshold an auditor has for an account balance, the more the evidence the auditor must collect to be sure the account balance is correctly stated. Auditors usually use quantitative benchmarks such as 1% of total assets or 5% of revenue to determine whether misstatement materially affect the financial statements. However, at the end of the day, a given misstatement is considered material or not based on the auditors professional judgment. Celestial Ltd and Tepas Ltd are clients of Eureka &Associates, a local auditing firm in Ghana. Celestial Ltd has weaker controls over account receivable compare to Tepas Ltd (i.e. Celestial Ltd is riskier than Tepas Ltd). Again, Tepas Ltd is smaller in size to Celestial Ltd, and the auditor (Eureka &Associates) has concluded that a misstatement exceeding GH5,000,000 will be material for Tepas Ltds account receivables. Required a) Should the materiality threshold for Celestial Ltd be the same as, more than or less than that for Tepas Ltd? Explain b) Discuss why one client may require more audit evidence to be collected. c) Compare the possible alternative monetary threshold that a more skeptical auditor versus a less skeptical might make for Celestial Ltd
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