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Dear Professor,,
First thanks so much for your appreciated help & care regarding our career & future.
Second my question is that i have been in the quiz of chapter 5 asked a MCQ question saying “On which 2 of the following does the determination of materiality depend?
Option 1: The nature of errors (Qualitative Factors).
Option 2: The size of errors (Quantitative Factors).
Option 3: The economic decisions of a user of the Financial Statements.The system has made the anwser as being “Option 1” & “Option 2”. Why not “Option 3”? What is the problem in “Option 3”?
Thanks So Much,,,
If you look at the definition on page 32 it is not the economic decisions but the influence/effect that an omission or misstatement might have. The auditor can’t “measure” economic decisions – every shareholder/member will have their own agenda and their decisions will vary. So the auditor DETERMINES materiality based on what can be benchmarked – $size (the obvious one) and qualitative factors. So, for example, if materiality is $100k but profit is $50k and there is a mistatement of $70k which would turn the profit into a loss – it is this turning profit into a loss which is a qualitative consideration. A more common qualitative factors relates to matters which are required to be disclosed by the financial reporting framework – such as directors’ remuneration/loans. It doesn’t matter how much these are – they have to be disclosed (accurately).
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