Understanding OM
May 31, 2021
Change Implementation and Management Plan
May 31, 2021

Minimizing Audit Risk

A misstatement of a given size might be material for a small company, whereas the same dollar misstatement could be immaterial for a larger one.
Bases are needed for evaluating materiality
Net income before taxes is normally the most commonly used base, but other possible bases include current assets, total assets, current liabilities, and owners’ equity.
Qualitative factors also affect materiality
Certain types of misstatements are likely to be more important to users than others, even if the dollar amounts are the same
Because Auditors determine if there is a misstatement and the level of material in it, I think it’s best to develop an audit plan of action.  According to PCAOB, “The effect of the misstatement on segment information, for example, the significance of the matter to a particular segment important to the future profitability of the company, the pervasiveness of the matter on the segment information, and the impact of the matter on trends in segment information, all in relation to the financial statements taken as a whole.”  https://pcaobus.org/Standards/Archived/PreReorgStandards/Pages/Auditing_Standard_14_Appendix_B.aspx

 

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