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What do auditors consider before appropriately testing whether an item is material or not?

      

What do auditors consider before appropriately testing whether an item is material or not?

  

Answers


Wilfred
Auditors consider the following before appropriately testing whether an item is material or not.
1. Qualitative aspects: these may include inadequate or inaccurate descriptions of an accounting
policy.
2. Cumulative effect of small amounts: small errors at a month end procedure could individually
be immaterial but continuous errors of this kind throughout the financial year could be
material.
3. Relatively of materiality. A figure of Kshs. 100,000 may be absolutely immaterial for a large
company but absolutely material for a small company. An amount must be considered in
relation to:
•• Items on the overall financial statements level.
•• Items at individual account balance or transaction level
•• Legal and other disclosure requirements which may require disclosure regardless of
the monetary value e.g. director’s fees.
•• The corresponding amount in the previous year.
4. The degree of latitude allowable in deciding on the amount attributable to a particular item.
While some items such as director’s fees are capable of an exact definition, others such as
depreciation and allowance for doubtful debts are at best an intelligent estimate. In some
countries e.g. US, the security exchange commission estimate materiality as follows;
•• Errors greater than 10% are material
•• Errors between 5% and 10% may be material
•• Errors below 5% are not material
5. In evaluating the true and fair presentation of financial statement, the auditor should assess
whether the aggregate of uncorrected misstatements that have been identified in the audit
is material. The auditor should reconsider all uncorrected misstatements and check whether
this total is material.
Wilfykil answered the question on April 11, 2019 at 08:04


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