Anne Aylor Case - 1

1399 words 6 pages
Accounting 732
Audit II
Anne Aylor Inc.

A. Why are different materiality bases considered when determining planning materiality?

Different materiality bases are considered when determining planning materiality because the magnitude and nature of financial statement misstatements or omissions have different influences on different financial statement users. For example, investors are more interested in the accuracy of numbers involving net income because they are mainly concerned with the company’s ability to increase shareholder wealth. For an audit company, the primary concern when planning materiality is to take into account all expected financial statement users. These different expected users all have different
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To keep costs from reaching an impractical level, auditors must adjust the tolerable misstatement percentages based on the risk involved with the account, and the impact that misstatement in certain accounts has on financial statement user’s decision making. In summary an auditor must balance costs and time while keeping in mind that certain accounts have a greater affect on decisions made by financial statement users.

F. Why does the combined total of individual account tolerable misstatements commonly exceed the estimate of planning materiality?

The total of individual account tolerable misstatements commonly exceeds the estimate of planning materiality because often account misstatements have a balancing affect on the financial statements. However, as the likelihood of managerial fraud increases this becomes unreliable. For example, while a company may slightly overstate sales, there may be a misstatement in expenses that helps to balance out net income. Also, many accounts actual misstatement will be less than the tolerable misstatement. While some accounts may contain errors which are higher than tolerable misstatement, the accounts that are below tolerable misstatement help to balance out the total misstatements, keeping total misstatement below the total tolerable misstatement.

G. Why might certain trial balance amounts be