Audit Materiality and Performance Materiality: How to Use Them
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- čas přidán 28. 05. 2024
- Audit materiality and performance materiality are two of the most critical factors in an audit. Get this right, and you're on your way to a successful engagement. Get it wrong, and it could be disastrous. Materiality is key to audit planning, and finishing the engagement in a proper manner. Yet, CPA firms continue to receive peer review comments about these areas. See how materiality is used to guide you in your planning and in your concluding your audits. The video covers the selection and use of benchmarks and percentages to compute materiality. You'll also hear how intended financial statement users are considered in selecting a benchmark.
00:00 Introduction
00:10 Ingredients of materiality
00:33 Benchmark
01:27 Intended financial statement users
01:53 Percent applied to benchmark
03:10 Example of materiality
03:50 Performance materiality
05:17 Aggregate risk
06:30 Cushion for undetected misstatements
07:15 Lower materiality for risky areas
08:33 FASB’s defines materiality
09:12 Intended user is potential buyer of the company
09:50 Using materiality
11:00 Evaluating unposted audit entries
12:42 Summary
#CPAHallTalk
This 13 minute explanation was far better than my 2-hour lecture in uni and actually got the point across. Thank you.
Thanks, Alex. Glad you found it helpful.
Best explanation for overall materiality and performance materiality I have watched. Thanks!
Glad it was helpful!
I've been enjoying your lectures as I prepare to take AUD (my last exam before I earn my CPA). I like the way you break down the topics. Thank you for this resource!
Great explanation, thank you!
Very lucidly explained. Thank you very much.
Performance materiality is also known as tolerable error. Nice explanation sir ❤️
Thanks Mr Hall.
Great articles on your website and CZcams channel. Our small CPA firm really appreciate the materials you produce. Merry Christmas!
Thanks, Gary. I am glad you find the information useful.
Really appreciate your vlog . Thank you 😊
Excellent explanations.
That was really well laid out and structured. Thank you so much
Glad you enjoyed it!
Thank you Sir! you made me understand materiality and I like the way how you explained it 🙏😀
Excellent video. Thanks for sharing this wealth of knowledge and experience.
Very helpful compared with lengthy and wordy definitions issued in standards, Thank you!!
Glad it was helpful!
Very insightful
Appreciate your clear and thorough explanation
Thank you, Sophie.
Thank you sir. You could not have explained it better.
Great video, thank you for the explanation about PM!
Thank you, Runsa.
Thank you sir! Excellent Explanation!!
Thank you, Vamshidhar.
Doing an audit case for my Master's in accounting and this really assisted my understanding and hopefully our grades.
Hope your tests go well, Harveer.
Thanks!
Thank you very much. :)
You are welcome, Emma.
Thank you Sir!
You are welcome, Edwin!
when you are talking about planning materiality being the financial statements as a whole what exactly do you mean? For example if overal materiality was $100,000 and total assets were overstated by $150,000 that would be materially mistated? What If both revenue and expenses were overstated by amounts over planning materiality but it didnt cause net income to be mistated by more than overall materiality? Or if both assets and liabilities were overstated by the same amount the net effect on owners equity would be nothing then would the financials still be considered materially mistated?
Say materiality was $100k and you scoped out prepayments of $65k due to it being immaterial, but an error was identified in receivables of $65k too and the client did not correct, would this be an issue due to being $130k in aggregate or is this okay as they are separate lines in the FS?
How can we measure audit risk?
Most auditors measure risk using Low, Moderate, and High. You could, however, use a scale like 1 to 10 with 10 being high. There are many factors such as internal control weaknesses that affect the risk for an area. There’s not a way to assign points based on each issue you see (e.g., internal control weakness). You have to look at all factors and then assess risk for each area.
But let's say prepayments is only 10k, and performance materiality is 70k. So we won't do much testing on it. But what if that 10k has actually been understated by 200k? Now suddenly its a large balance. How would we detect that in an audit?
I dont think the approach of just leaving an account untested because its not material is good.
You make a good point, and yes, this can happen. The preliminary analytics should point out the prepaid asset understatement; if it does, then the auditor will note the risk of material misstatement and audit the amount, even though it’s not material. But if we audit every immaterial amount, the cost of the audit will skyrocket. Materiality is not fail-safe, but it provides a way for auditors to focus on the more important areas and keep the cost of the audit reasonable.
Good point. When I was working as a junior auditor I always think along that line too but my manager or senior will give an example like; " do you think it will be effective and efficient to send out AR confirmations to all the customers for for our audit client? Let's say 100 customers, with 100 AR confirmations.😁
Excellent explanation!! Thank you!
Glad it was helpful!