- This topic has 4 replies, 2 voices, and was last updated 1 month ago by
.
- Posts
Dear Kim,
The preliminary materiality benchmarks are:
0.5 – 1% Revenue;
1 – 2% Total Assets;
5 – 10% Profit before income taxes. (PBIT)Let’s use the PBIT benchmark and say there was a misstatement in the financial statements (FS) that is:
a) WITHIN the range of 5 – 10% of PBIT
b) ABOVE the range of 10% of PBITNow,
In (a) above, the audit opinion will, of course, be modified with a “Qualified Opinion” and an “Except for…” in the Basis for Qualified Opinion paragraph, because the matter is material but not pervasive – assumably.
BUT;
In (b), the misstatement is above the 10%; let’s say the misstatement is at 15%:
Q1: How will this affect the audit opinion?
Q2: What type of opinion will be issued in the audit report – qualified or adverse?PS: The reason I am asking is because of a particular question I practised in which the misstatement was about on provision and was about 86% material and was considered pervasive based on the percentage, but not based on its interaction or knock-on effects on other aspects (or items) of the FS.
Let me clarify. Less than the lower limit is generally considered immaterial. Above the upper limit is material. In-between is a matter of professional judgment.
If an auditor considers that an overstatement that is 7% of profit is material to a set of financialstatements, they must also consider amounts that are 8%, 9%, 10% … 29%…. 54% …. to be material.
Pervasive is not a “degree” of materiality but how the actual or potential misstatements affect the financial statements as a whole.
Adverse and disclaimed opinions are very rare in practice. The best example is when FS are prepared on a GC basis when that basis is NOT appropriate (not when there is material uncertainty, because GC is the appropriate basis in that case).
There can be numerous individual qualifications that collectively are judged to not be pervasive. (I once had a real example of an auditor’s report that had 21 separate qualifications… or perhaps it was 22 …)
Thank you, Kim.
Indeed, I have also understood that (via your lectures), the best application of the adverse and disclaimer opinions is on the GC basis.
Thanks once more.
- The topic ‘Materiality’ is closed to new replies.