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Hi sir,
I don’t understand this statement “The more material is the amount / account balance, auditor will require more evidence and set lower materiality level.”
Why auditor have to set lower materiality level? l thought we have to set a higher one because the balance is material.
Thank you and have a nice day!
Preliminary materiality is linked to assets, turnover and profits. Eg 5% – 10% of profits.
Say profits are $200m, materiality might therefore be set at $10m.
Say sales = $1,000m and electricity costs = $5m
An error of 1% overstatement of sales will be material, but an error in overstatement of electricity costs, even of 100%, will not be material.
What the sentence is trying to say is lots of evidence is needed about sales because even a small % overstatement is material. The materiality level for sales is therefore lower as a % than for a % of electricity.
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