PCAOB Standards: Guidance for Issuers |
PCAOB standards state that separate lower materiality levels should be set for particular accounts or disclosures when there is a substantial likelihood that misstatements of amounts less than the materiality level established for the financial statements as a whole would influence the judgment of a reasonable investor. |
Example 1 Calculating Materiality |
Facts: Evan, senior accountant at Noah CPA firm, is determining the overall financial statement materiality and tolerable misstatement for his client in Year 2. Evan expects that there will be a low likelihood of uncorrected and undetected misstatements. Noah CPA firm's materiality guidelines are as follows: ■ Overall financial statement materiality should be based on the benchmark of either total assets or gross revenue, whichever is larger, and should be calculated by taking the appropriate benchmark and multiplying it by either 1 percent, if the benchmark is total assets, or 0.5 percent, if the benchmark is gross revenue. |
■ Tolerable misstatement is calculated by multiplying the overall materiality by either 70 percent (for low likelihood of uncorrected and undetected misstatements) or 50 percent (for high likelihood of uncorrected and undetected misstatements). Selected financial information: ● Revenue: $2,500,000 ● Gross profit: $50,000 ● Total assets: $1,750,000 ● Stockholders' equity: $750,000 Required: Calculate overall financial statement materiality and tolerable misstatement. |
Solution: Overall materiality = Applicable benchmark × applicable percentage Overall materiality = $2,500,000 × 0.005 Overall materiality = $12,500 Tolerable misstatement = Overall materiality × applicable percentage Tolerable misstatement = $12,500 × 0.7 Tolerable misstatement = $8,750 Note: The applicable percentage and determination of the benchmark vary by CPA firm. Therefore, on the exam, it is important to read the facts to determine the appropriate benchmark, percentage, and formula that should be used. |
Question 1 CPA-02761 |
Which of the following statements is not correct about materiality? a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important. b. An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. d. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. |
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