Materiality
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CPA Auditing and Attestation (AUD) › Materiality
In terms of materiality
the AICPA sets the standard
IFRS sets the standard
the auditor’s judgment sets the standard
The SEC sets the standard
Explanation
The auditor's judgment determines the materiality level that the auditor is willing to accept.
In planning the audit, materiality provides a basis for:
The auditor's fee
Nature and extent of risk assessment procedures
The time necessary to perform the audit
Communication with the audit committee
Explanation
Materiality is the basis for determining the nature and extent of risk. This is examined during the planning stages. The sample size and testing are developed based on the level of materiality.
Of the following, which benchmark would be utilized when considering the materiality of a single cash transaction?
Deminimis
Performance materiality
Overall materiality
None of the answer choices are correct
Explanation
All of the answer choices are different thresholds, determined by experienced auditors. Analyzing a single transaction compared to a whole balance sheet account should use proper benchmarks.
Judgments about materiality are:
are affected by the size or nature of the misstatement
are made regardless of the size of the misstatement
are irrelevant to the size of the misstatement
are not affected by the size or the nature of the misstatement
Explanation
The definition of materiality is one that will influence the decision of the reader. Therefore, the size and nature of the decision will impact materiality
If new info becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should:
Lower the materiality level but not raise it
Raise or lower the materiality level as appropriate to the situation
Raise the materiality level but not lower it
Not change the materiality level once it has been established
Explanation
If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should raise or lower the materiality level as appropriate to the situation.
Of the following, which best describes the concept of materiality?
Information that directly impacts the income statement
Information that is likely to be viewed by a reasonable investor as altering the mix of available information
Information that meets strict thresholds predetermined
Information that is not likely to influence the decision making of an investor
Explanation
According to the US Supreme Court, information is material if there is a substantial likelihood that the information would be viewed by a reasonable investor as having significantly altered the total mix of available information.