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in the kaplan text, they give the following example and the reasoning as to why materiality is chosen to be between 105k and 97k. I do not understand the reasoning and i have reproduced the worked example below:
revenue——————————–1/2%——1%
2014———————————–110———220
2013———————————–98———–196profit b/tax—————————5%———–10%
2014———————————-52————-105
2013———————————-12————-25total assets————————–1%————2%
2014———————————–97%———194
2013———————————–73————146“more than 105k profit is material to the SOCI, therefore preliminary materiality is likely to be set so as not to exceed this amount. Less than 52k is not material to profit (or to the SOFP) so preliminary materiality shd no be less than this amount.
a suitable preliminary materiality level is most likely to be one that lies within the overlap of the ranges calculated for profit and total assets. 97k (1% of total assets) represents 9% of profit. as this is at the lower end of the assets range, this wd be relatively prudent measure of materiality (resulting in a higher level of audit work)”
can u explain this please??
thank u
I think the Kaplan text is a bit heavy-going. Preliminary materiality is only a preliminary estimate.
For SOFP amounts, materiality is fairly simple 1% – 2% of total assets.
Problems arise with the revenue and profit measures because you can have a huge revenue and minimal profits. Setting materiality based on profits could mean doing far too much work so some sort of compromise is needed.
So, here, I would suggest a materiality level of around $100,000 would work quite well as it is within all three ranges.
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